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Comprehensive annual financial report of the University of North Carolina at Chapel Hill

Comprehensive annual financial report of the University of North Carolina at Chapel Hill

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THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
2005 COMPREHENSIVE
ANNUAL FINANCIAL REPORT
A Constituent Institution of the University of North Carolina System and a Component Unit of the State of North Carolina
Fiscal Year Ended June 30, 2005
Chapel Hill, North CarolinaTHE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
2005 COMPREHENSIVE
ANNUAL FINANCIAL REPORT
A Constituent Institution of the University of North Carolina System and a Component Unit of the State of North Carolina
Fiscal Year Ended June 30, 2005
Chapel Hill, North Carolina| THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
TABLE OF CONTENTS
3 Introductory Section
4 Message from the Chancellor
7 Letter of Transmittal
12 Progress and Major Initiatives
21 Board of Trustees
21 Chancellor’s Cabinet
22 Organization Chart
23 Financial Section
24 Report of the Independent Auditor
26 Management’s Discussion and Analysis
BASIC FINANCIAL STATEMENTS
40 Statement of Net Assets
42 Statement of Revenues, Expenses, and Changes in Net Assets
43 Statement of Cash Flows
45 Statement of Financial Position — Component Units
46 Statement of Activities and Changes in Net Assets — Component Units
47 Index to the Notes to the Financial Statements
48 Notes to the Financial Statements
74 Statistical Section
76 Schedule of Operating and Non-operating Revenues by Source
77 Schedule of Operating Expenses by Nature
78 Schedule of Operating Expenses by Function
80 Schedule of Ratios
86 Schedule of Specific Revenue and General Revenue Bond Coverage
88 Annual Undergraduate Educational Costs Per Student
90 Admissions
91 Enrollment
92 Degrees Earned
93 Faculty and Staff Statistics
95 Historical Statistical Section
96 Schedule of Unrestricted General and Restricted Funds Revenues by Source
98 Schedule of Unrestricted General and Restricted Funds Expenditures and Mandatory Transfers by Function
100 Schedule of Current Funds by Source
102 Schedule of Current Funds by Source Adjusted for Inflation
104 Schedule of Current Funds Expenditures and Mandatory Transfers by Function
106 Schedule of Ratios
114 Schedule of Gross Debt Service Coverage and Ratio of Debt Service to Current Expenditures INTRODUCTORY SECTION
Snow covers the north end of McCorkle Place, close to Franklin Street.| THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
We aspire for the University of North Carolina at Chapel Hill to become the nation’s leading public university. We want Carolina to be the best that it can be. In setting our sights so high, we are drawing upon our past as the nation’s first public university and our deep commitment to helping make North Carolina successful in the future. Our campus community, alumni, friends, and key volunteers embrace this ambitious vision for Carolina.
Recent accom­plishments show we are pointed down the right path for suc­cess. In fall 2005, the University enrolled the most academically prepared first-year class in our history. Nearly 10 percent of these students (346) were in our second class of Carolina Covenant Scholars. An unprecedented $1.5 billion construction and renovation program, believed to be the largest capital program on any U.S. campus, is making rapid progress. Over the past decade, faculty research fund­ing has increased significantly, affirming our status among the national research leaders in health care, science, and technology. Alumni and friends are giving generously to the Carolina First Campaign, whose volunteer leaders increased the goal to $2 billion.
Carolina is moving forward with tremendous momentum. Our challenge is to sustain that energy and focus it to best serve the people of North Carolina. Following are details about a few recent developments.
Carolina Covenant, Access, and Affordability
We were the first major American public university to promise a debt-free education to low-income students. The Carolina Cov­enant, now in its second year, is for eligible students and families at or below 200 percent of the federal poverty level. That covers a family of four making $37,000 annually or a single parent with a child at $24,000. We created a faculty volunteer mentor program so these students receive the support they need. Total attrition after our first year was less than 2 percent, a tribute to our first Carolina Covenant Scholars.
Carolina led the reversal of a national trend in which many universities diverted funds from need-based to merit-based pro­grams to compete for high-ability students. We challenged other campuses to make similar investments to ensure affordability and access for deserving students. Many responded including Virginia, Maryland, Michigan, Nebraska, Illinois, Harvard, and Brown. Serving these students remains part of the national debate about accessibility, and we are often asked to share Carolina’s perspective with national colleagues.
Few universities can declare, as we do, that they meet 100 percent of the demonstrated financial need of their students. Through the Carolina Covenant and an excellent overall finan­cial aid program, we are making college possible for qualified students without regard for family income. This commitment stems from strong state funding for financial aid across the UNC System as well as our own Board of Trustees’ policies, which stress extensive need-based aid (35 percent to 40 percent) when campus-based tuition rises.
Students from middle-class families do not bear the burden of higher tuition and costs. We meet all of their need. Average debt among graduating seniors who borrowed was $11,751 in 2004. In 2003, that number was $11,519, down from $13,700 in 2000. Less than a quarter of our graduating students accumulated debt. By contrast, the nation’s average student debt loan doubled to $18,900 in about a decade.
Our practices protect access and affordability. Among our
undergraduates, 33 percent received need-based financial grants in 2004-05. We met two-thirds of our undergraduates’ need with scholarships and grants and the remaining third with loans and work-study jobs. Traditionally, aid packages on other campuses are closer to two-thirds loans and one-third grants.
Enhancing Service to North Carolina
Aim of New Task Force
What is the role of a great university in a state that must compete in a global economy? If there is one thing I have learned in my travels to nearly 50 communities last year around the state, it is this: our University is deeply engaged in the issues that matter most to North Carolinians—their health, their economy, and their education. In every place I have visited I have seen our students, faculty and staff making a difference and touching people’s lives.
The Institute of Government, the Area Health Education Centers Program and the Carolina Center for Public Service are wonder­ful examples of our engagement with North Carolina.
But we can do more to match our resources with the state’s needs. We have convened a Chancellor’s Task Force on Engage­ment, and senior campus officers and leaders have joined me to consider new ways to mobilize resources. One special focus is
MESSAGE FROM THE CHANCELLOR
JAMES MOESER has severed as the chancellor of the Univesity since 2000.
If there is one thing I have learned in my travels to nearly 50 communities last year around the state, it is this: our University is deeply engaged in the issues that matter most to North Carolin­ians—their health, their economy, and their education. 2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT |
K-12 education and how we can help the state’s schools achieve dramatic gains in teaching and learning for all children. Other areas of emphasis include health care and economic development.
Faculty Compensation Remains Top Priority
Our number one priority remains attracting and retaining the finest faculty. As we benchmark ourselves against our national academic peers, we have worked hard to make up lost ground—to stay competitive with America’s and now the world’s best universities.
Last year, we raised money for 25 new endowed faculty chairs through the Carolina First Campaign. The General Assembly generously appropriated $8 million in recurring funds across the UNC System to match these gifts and doubled the amount to be matched by the state. Our share of these new state funds totaled $4.3 million, clearing the way for 18 of the 25 new chairs to be fully funded.
Carolina First Aims Higher—$2 Billion
The overwhelming success of our Carolina First Campaign is a tribute to the passion that our alumni and friends have for this University. In October 2005, our campaign steering committee increased the campaign’s goal from $1.8 billion to $2 billion to support the University’s vision of becoming the nation’s leading public university.
Now Carolina is one of just eight American universities seek­ing campaign goals of at least $2 billion. At this writing, Carolina First has secured more than $1.56 billion, 78 percent of the new goal, while being about three-quarters complete. We have created 151 endowed professorships for faculty and 523 scholarships and fellowships for students with funds that are part of the $628 mil­lion that has been raised in gifts and pledges for the University’s endowment. Donors have made possible new research, new aca­demic programs and initiatives, and helped pay for renovating and building new facilities. In setting the goal $200 million higher, we are focusing on faculty support, merit-based scholarships, and capital projects, the three most pressing priorities to keep Caro­lina competitive with our peers.
Faculty Research Funding Key to Future Success
Faculty research pumps hundreds of millions of dollars into the North Carolina economy and creates jobs through new products and spin-off companies. The faculty attracted $579 million in total contract and grant funding in fiscal 2005—up slightly. The National Institutes of Health is our central funding source, and we ranked 15th overall in 2004 with nearly $290 million.
This fall, Carolina became the nation’s only university to receive eight grants in the NIH “Roadmap for Medical Research” initia­tives. This effort encourages researchers to attack complex prob­lems using interdisciplinary collaboration and sophisticated com­putational techniques to create quick translations to patient care.
CAMPUS BEAUTY The beauty of the Carolina campus is one of the University’s major assets. The American Society of Landscape Architects selected the Carolina campus as one of the most beautifully landscaped spots in the country. That listing is typical of the praise the University receives affirming the charm of mighty oaks, majestic quadrangles, brick sidewalks, and other landscaping synonymous with Carolina.| THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
Following Carolina were Vanderbilt and Columbia, with six; Me­morial Sloan-Kettering Cancer Center with five; Johns Hopkins at four; Harvard and Stanford with three; and Duke with two. Our funding so far totals $15.5 million and includes starting the Carolina Center of Nanotechnology Excellence, which will mar­ry expertise in nanotechnology with patient research at the UNC Lineberger Comprehensive Cancer Center. Last year, Carolina also received three of the 21 initial Roadmap grants—more than any other university.
Major construction projects completed;
cancer hospital breaks ground
We have reached several milestones with the construction pro­gram over the past year. Here is a sampling of recent highlights:
Memorial Hall, resplendent after a three-year, $18 mil­lion transformation, reopened in September 2005 with the n
launch of an exciting new Carolina Performing Arts Series featuring over 700 artists. We have set a goal of a $10 million endowment to support this high level of program quality. A challenge grant of $5 million from the William R. Kenan, Jr. Charitable Trust will help us realize this objective.
The Michael Hooker Research Center more than doubled the School of Public Health’s research space with 31 new laboratories as well as high-tech conference rooms and classrooms. Faculty and students there are studying the link between nutrition and cancer risks, protecting the safety of our air and drinking water and searching for vaccines for infectious diseases.
Rams Head Center, a multi-purpose facility adjacent to Kenan Stadium, offers a student recreation facility, excellent dining opportunities, and a parking deck all built as part of a state-of-the-art, environmentally friendly complex. Rams Head is an important step in transforming the southern region into an integral part of campus.
We opened the Baity Hill and Mason Farm communities, located behind the Dean Smith Center, to house student families, many of whom are graduate students and postdoc­toral students serving as teaching assistants. These facilities replace Odum Village, now a transition space while residence halls are renovated.
We broke ground for the North Carolina Cancer Hospital, which will become a world-class hospital for cancer patients and their families from North Carolina and beyond. The new hospital will bring complete cancer care for patients and re­search facilities into one building and serve as the new clini­cal home for the UNC Lineberger Comprehensive Cancer Center. The General Assembly authorized $180 million to build this facility during the 2004 session.
Conclusion
2004-2005 was another successful year in Chapel Hill. We made excellent progress. Working closely with our trustees, we have set solid priorities that address our overarching vision of becoming America’s leading public university. The people of North Caro­lina and beyond deserve nothing less. We strive to ensure that everything our students, faculty and staff do—through teaching, research and public service—supports the objective of creating a model public university.
Sincerely,
James Moeser
UNC Chancellor
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BREAKING GROUND Three-year-old cancer patient Reece Holbrook dem­onstrates his shovel skills at the groundbreaking for the North Carolina Cancer Hospital. Joining Reece were Chancellor James Moeser, State Senator Jeanne Lucas, and Dr. Richard Goldberg. The new hospital will bring complete cancer care for patients and research facilities into one building.2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT |
Introduction
This Comprehensive Annual Financial Report includes the financial statements for the year ended June 30, 2005, as well as other useful information that helps ensure the University’s accountability to the public. Responsibility for the accuracy of the information and for the completeness and fairness of its presentation, including all disclosures, rests with the University’s management. We believe the information is accurate in all material respects and fairly presents the University’s financial position, revenues, ex­penses, and other changes in net assets. We believe our system of internal controls is sound and suf­ficient to disclose material deficien­cies in controls to the auditors and the audit commit­tee. The Compre­hensive Annual Financial Report includes all disclosures necessary for the reader to gain a broad understanding of the University’s financial position and results of operations for the fiscal year ended June 30, 2005. The report is organized into three sections.
The Introductory Section includes a message from the chancellor, the transmittal letter, a listing of the University’s Board of Trustees, Chancellor’s Cabinet, and an organization chart. This section also features the University’s major recent initiatives, priorities, and prog­ress. Overall, this section provides background about the organization and structure of the University, the scope of its operations, significant factors contributing to the current fiscal environment, and expected factors influencing the future.
The Financial Section presents management’s discussion and analysis, basic financial statements, and a report of the Office of the State Auditor. Management’s discussion and analysis provides an objec­tive review of the University’s financial activities. The basic financial statements are prepared in accordance with accounting principles generally accepted in the United States of America as prescribed by the Governmental Accounting Standards Board.
The Statistical Section contains selected financial, statistical, and demographic information. This information provides a broad over­view of trends in the University’s financial affairs. Also included is historical statistical information reproduced from the 2004 Com­prehensive Annual Financial Report. In addition, the Statistical Section contains information on the Cost of College Project of the National Association of College and University Business Officers.
The accompanying financial statements present all funds belonging to the University and its component units. While the 16-campus University of North Carolina System’s Board of Governors has ultimate responsibility, the chancellor, the University’s Board of Trustees, and the Board of Trustees of the Endowment Fund have both delegated and statutory responsibilities for financial account­ability of the University’s funds. For the fiscal year ended June 30, 2005, the University implemented Governmental Accounting Standards Board (GASB) Statement No. 40, Deposit and Investment Risk Disclosures. This statement amends GASB Statement No. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements, to establish and modify disclosure requirements related to investment risks: credit risk (including custodial credit risk and concentrations of credit risk), interest rate risk, and foreign currency risk. This statement also establishes and modifies disclosure requirements for deposit risks: custodial credit risk and foreign currency risk.
The financial reporting entity for the financial statements is com­prised of the University and 10 component units. Although legally separate, The University of North Carolina at Chapel Hill Founda­tion Investment Fund, Inc. (Investment Fund), UNC Investment Fund, LLC (System Fund), UNC Management Company, Inc. (Management Company), The University of North Carolina at Chapel Hill Foundation, Inc., The Kenan-Flagler Business School Foundation, The School of Social Work Foundation Inc., and U.N.C. Law Foundation, Inc. are reported as if they were part of the University.
The Investment Fund supports the University by operating an investment fund for charitable, non-profit foundations, associations, trusts, endowments, and funds that are organized and operated pri­marily to support the University. The System Fund was organized to allow the University, the University of North Carolina and its constituent institutions (UNC System), affiliated foundations, as­sociations, trust, and endowments that support the University and the UNC System to pool their resources and invest collectively in investment opportunities identified, structured and arranged by the Management Company. The Investment Fund contributed and assigned all of its assets to the System Fund in exchange for membership interest in the System Fund. At year end, the Invest­ment Fund membership interest was approximately 93 percent of the System Fund total membership interest.
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November 30, 2005
To Chancellor Moeser, Members of the Board of Trustees, and Friends of The University of North Carolina at Chapel Hill:
NANCY SUTTENFIELD has served as vice chancellor for finance and administration for the University since 2000.
We believe the information is accurate in all material respects and fairly presents the University’s financial position, revenues, expenses, and other changes in net assets. We believe our system of internal controls is sound and sufficient to disclose material deficiencies in controls to the auditors and the audit committee.| THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
The Management Company is organized and operated exclu­sively to support the educational mission of the University. The Management Company also provides investment management services to the University, UNC System, and affiliated tax-exempt organizations. The purpose of UNC-CH Foundation, Business School Foundation, Social Work Foundation, and Law Founda­tion is to aid, support, and promote teaching, research, and service in the various educational, scientific, scholarly, professional, artis­tic, and creative endeavors of the University.
The financial statements of the Investment Fund, System Fund, Management Company, UNC-CH Foundation, Business School Foundation, Social Work Foundation, and U.N.C. Law Founda­tion have been blended with those of the University.
Separate financial statements for three other component units are reported based on GASB Statement No. 39. The Medical Foundation of North Carolina, Inc., The Educational Foundation Scholarship Endowment Trust, and The University of North Car­olina at Chapel Hill Arts and Sciences Foundation, Inc. are legally separate, not-profit, tax-exempt organizations and are reported as discretely presented component units based on the nature and significance of their relationship to the University.
Other related foundations and similar non-profit corporations for which the University is not financially accountable are not part of the accompanying financial statements. The University of North Carolina at Chapel Hill is a constituent institution of the 16-campus University of North Carolina System, which is a component unit of the State of North Carolina and an integral part of the State’s Comprehensive Annual Financial Report.
Economic Condition and Outlook
According to a June 23, 2005, release from the Bureau of Eco­nomic Analysis (BEA) of the U.S. Department of Commerce, the gross state product (GSP) of North Carolina in 2004 was $335.4 billion or 2.9 percent of the total $11.6 trillion for the entire U.S. The North Carolina increase was 6.3 percent from 2003, which was slightly below the 6.6 percent national average. This result meant that North Carolina was the 11th largest economy among all states in 2004. Georgia was 10th at $340.7 billion and Virginia was 12th at $326.6 billion.
Total personal income in North Carolina was $250.3 billion in 2004, according to a BEA release of September 28, 2005. This was an increase of 6.7 percent from the revised $234.5 billion of 2003. This increase was well above the 6 percent national average. The BEA release indicated that personal income in North Caro­lina was running at a seasonally adjusted annual rate of $265.8 billion in the second quarter of calendar year 2005. This was an increase of 7.4 percent from the second quarter of 2004, which compares quite favorably with the national average increase of 6.5 percent for the same period.
The state budget situation has been affected by the economy for over five years now. One big reason, which North Carolina shares with 20 other states, is that nonfarm payroll employment has yet to recover from the 2001 recession. According to the Bureau of Labor Statistics (BLS) of the U.S. Department of Labor, total nonfarm payroll employment on a seasonally adjusted basis hit its all-time peak of 3,967,500 jobs in January 2001, which was just before the start of the recession in March. According to the BLS state and regional employment release of September 16, 2005, there were 3,892,300 such jobs in North Carolina in August 2005. This represents a decline of 75,300 jobs or 1.9 percent from the peak. Only five states (South Carolina, Illinois, Ohio, Mas­sachusetts, and Michigan) have had a greater decline over the past four years than what North Carolina has experienced.
However, the employment picture from the household survey, a completely different measure of employment in the U.S., is much more optimistic. The previous peak was 3,989,425 people employed in January 2001 on a seasonally adjusted basis. That was first exceeded in December 2003 and every month since then has been above the previous peak. According to the September 16, 2005 BLS release, there were 4,095,572 people employed in North Carolina in August on a seasonally adjusted basis. That was 106,147 more people employed or a 2.7 percent increase from the January 2001 level. It was also up 57,772 people, or 1.4 percent, from August 2004.
The increase from the previous peak ranks North Carolina eleventh in the U.S. in total net employment gains over the post-2001 recession period, just below Nevada and just above Pennsylvania. This means that many more people have become self-employed in North Carolina over the past four years. The robust increases in personal income over this period suggest that most of them have been successful.
Consensus forecasts are for the U.S. economy to grow about 3.5 percent in real (adjusted for inflation) terms in calendar year 2006. North Carolina should manage real GSP growth of about 4 percent. That would be a welcome improvement in the overall economic situation.
Progress and Major Initiatives
Carolina’s progress, priorities, and major initiatives during fiscal year 2004-2005 reflected the University’s vision of becoming the nation’s leading public university. Following this letter are high­lights from fiscal year 2004-2005.
Financial Information
Internal Control Structure
The University’s Finance and Administration Division establishes and maintains an effective system of internal control. One objec­tive of an internal control structure is to provide management with reasonable, although not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition. Another objective is to ensure that transactions are executed in accordance with appropriate authorization and recorded properly in the financial records to permit the preparation of financial statements in accordance with generally accepted accounting principles. Organizational structure, policies, and procedures have 2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT |
been established to safeguard assets, ensure the reliability of ac­counting data, promote efficient operations, and ensure compli­ance with established governmental laws, regulations and policies, University policies, and other requirements of sponsors to whom the University is accountable.
As a recipient of federal financial awards, the University is re­sponsible for ensuring compliance with all applicable laws and regulations. A combination of state and University policies and procedures, integrated with the University’s system of internal controls, provides for this compliance. As an integral part of the State of North Carolina’s Single Audit, the University is subject to an annual examination by the Office of the State Auditor of its federal financial assistance programs and federal cost-reimburse­ment contracts in accordance with U.S. Office of Management and Budget Circular A-133, Audits of State and Local Govern­ments, and Non-Profit Organizations.
The University determined a course of action as part of higher education’s reponse to the Sarbanes-Oxley Act and has imple­mented practices to enhance the internal control structure. The University’s focused effort on financial controls provides a more proactive and broader approach in identifying and resolv­ing potential limitations on sound internal control through a self-assessment process, development of a professional code of ethics, targeted campus training sessions, special reviews, im­proved documentation of internal controls, and timely and useful responses to questions from campus units. A financial controls manager leads efforts to strengthen and maintain sound internal controls. The Audit and Finance Committee of the Board of Trustees maintains an Audit Committee charter consistent with higher education standards.
Budgetary udgetary udgetary Controls
The University is responsible for controlling its budget and using the funds to fulfill its educational, research, and public service missions. It is also responsible for planning, developing, and con­trolling budgets and expenditures within authorized allocations in accordance with University, state, and federal policies and pro­cedures. The University maintains budgetary controls to ensure compliance with provisions embodied in the annual appropriated budget approved by the North Carolina General Assembly, and as further directed by the Board of Governors. Project-length financial plans are adopted for capital projects.
After the budget has been approved by the chancellor and the Board of Governors, the University follows an established system of budgetary controls. Finance and Administration issues periodic interim budget statements to department heads to guide them in managing their budget allocations. Monthly financial reports are provided on each fund to individual managers responsible for the fund. Financial reports are also provided to the state. When actual conditions require changes to the budget, revisions are prepared, and these revisions are appropriately approved and communi­cated to those affected. Changes to the budget are approved at the University level and/or the state level as required. Based on the state’s management flexibility legislation, the University has received delegated authority for designated budget changes. The University maintains an encumbrance accounting system as another method to ensure that imposed expenditure constraints are observed.
Debt Administration dministration
To ensure the appropriate mix of funding sources is utilized, the University established a debt policy, which is continuously used by management as a tool to evaluate the University’s organiza­tional and capital funding structure, the appropriate use of lever­age, and internal lending mechanisms.
To fulfill its mission, the University will need to make capital investments, driving capital decisions that affect the University’s credit. Appropriate financial leverage serves a useful role and should be considered a long-term component of the University’s balance sheet. Just as investments represent an integral compo­nent of the University’s assets, debt is viewed to be a continu­ing component of the University’s liabilities. Debt, especially tax-exempt debt, provides a low-cost source of capital for the University to fund capital investments and achieve its mission and strategic objectives.
The debt strategies, combined with management judgment, provide the framework by which decisions will be made regard­ing the use and management of debt. The objectives of the debt policy are:
Identify projects eligible for debt financing. Using debt to fund mission-critical projects will ensure that debt capacity is optimally used to fulfill Carolina’s mission. Projects that relate to the core mission will be given priority for debt financing; projects with associated revenues will receive
priority consideration as well.
Maintain Carolina’s favorable access to capital. Management’s determination of the timing of capital projects will not be compromised by the University’s access to capital sources, including debt. Management will use and issue debt to
ensure timely access to capital.
Limit risk of University debt portfolio. The University will manage debt on a portfolio basis. The University’s continu­ing objective to achieve the lowest cost of capital will be balanced with the goal of limiting exposure to market shifts.
Manage the University’s credit to maintain the highest acceptable credit. This practice will permit the University to continue to issue debt and finance capital projects at favorable interest rates while meeting strategic objectives. The University will limit its overall debt to a level that will maintain an acceptable credit rating with the bond rating agencies.
In meeting these objectives, the University has adopted strategies and procedures for the management of its debt. These strategies include the following:
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10 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
Mission-Based Capital Planning. Provide framework with a link to mission to evaluate and prioritize debt-eligible projects.
Core Ratios. Adopt a set of core ratios to guide capital planning and ensure central oversight of University-wide leverage levels.
Financial Instruments. Provide management with appropri­ate debt vehicles based on borrowing needs.
Asset/Liability Management. Manage outstanding debt and future debt-financing needs within the framework of sound portfolio management practices.
The University has $456.1 million of outstanding long-term bonds and $141.1 million of commercial paper at June 30, 2005. The bonds were issued to finance the construction and/or renovation of many campus facilities including es­sential new research buildings, major new cultural facilities that will benefit the local community and state, undergraduate residence halls, student family housing, and parking facili­ties. Principal and interest for the bonds are payable from the general revenues of the University - excluding state appro­priations, tuition, restricted gifts and restricted income from endowment investments - and net revenues generated by the operations of the debt-financed facilities.
The UNC-CH Foundation, which is part of the University’s financial reporting entity, also adheres to a debt policy that maximizes the utility of the foundation’s financial resources
to continue to provide current and future support to the University.
Cashashash Managementanagementanagementanagementanagementanagementanagementanagementanagement
The cash management plan of the University provides guidance to ensure control and deposit of receipts, appropriate manage­ment of disbursements, and investment of funds to maximize earnings on the investment of cash and minimize nonproductive cash balances. State law requires that state-appropriated funds be deposited and invested with the State Treasurer with investment earnings accruing to the state. Other resources, such as gifts, contract and grant awards, auxiliary revenues, and student activ­ity fees are not appropriated by the state. These funds, except for fees from services of health-care clinics, must be deposited and invested with the State Treasurer with investment earnings accruing to the University. Endowment, debt service, fees from services of health-care clinics, and other designated funds are invested by the University in accordance with its investment policies.
The University administers a short-term investment pool for funds not required to be on deposit with the State Treasurer. The investment pool is administered in conjunction with cash receipts and disbursing requirements to minimize idle cash and to generate current income without loss of capital at a rate of return no less than the State Treasurer. Earnings are distributed n
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to participating funds.
The objective in managing disbursements is to maintain funds in interest-bearing accounts for the longest appropriate period of time while ensuring that payments for goods and services are made timely. Disbursement cycles are established to coincide with this objective. The University uses the state’s cash man­agement control system to improve cash flow by electronically recording cash receipts and disbursements for funds deposited with the State Treasurer. Other electronic processes have been developed for the receipt and disbursement functions to provide efficient and effective processes.
Riskiskisk Managementanagementanagementanagementanagementanagementanagementanagementanagement
Risk has traditionally been viewed as something to be avoided or eliminated with only a negative outcome. Increasingly in today’s environment, risk is more broadly defined as any issue that affects an organization’s ability to meet its objectives. There is also greater awareness that responsible risk taking leads to a competitive advantage and can maximize stakeholder value.
To optimize the benefits of risk and minimize their costs, the University has taken a more enterprise-wide approach to its risk management programs by holistically addressing its opera­tional, financial, compliance, strategic and reputation risks. This enterprise risk management framework ensures that decisions that trade value and risk are made on an informed basis and are aligned with our risk tolerance and strategy. Addressing our full portfolio of risks is also a critical element of our strategic plan­ning process. During the past year, the Enterprise Risk Manage­ment Advisory Committee began assessing the University’s most critical risk drivers. This ongoing process allows us to prioritize and efficiently use our risk management resources.
Included within this enterprise risk management framework is our responsibility to mitigate any business interruption that adversely affects our education, research, and public service missions. An effective campus-wide continuity plan is central to this responsibility. Therefore, the committee’s charter has been expanded to include a Business Continuity Plan. Moving forward, we intend to build from our past business continu­ity success and develop a more robust, campus-wide Business Continuity Plan.
Insurable risks are addressed in several ways, including par­ticipation in various state-administered risk pools, purchase of commercial insurance, and self retention of certain risks. Refer to Note 14 of the Notes to the Financial Statements for more detailed information concerning the University’s insurance programs.
Other Information
Auditsuditsuditsuditsudits
State law, federal guidelines, and certain bond covenants require that the University’s accounting and financial records be audited 2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 11
by the Office of the State Auditor each year. The University’s Internal Auditors also perform fiscal, compliance, and perfor­mance audits. The reports resulting from these audits are shared with University management. Internal and external audit re­ports are provided to the Audit and Finance Committee of the Board of Trustees.
The audit of the University’s federal financial assistance pro­grams is performed by the Office of the State Auditor in conjunction with the statewide Single Audit. The accounting and financial records of The University of North Carolina at Chapel Hill Foundation Investment Fund, Inc., The Univer­sity of North Carolina at Chapel Hill Foundation, Inc., UNC Investment Fund, LLC, UNC Management Company, Inc., The Kenan-Flagler Business School Foundation, The School of Social Work Foundation, Inc., The U.N.C. Law Foundation, Inc., the University of North Carolina at Chapel Hill Arts and Sciences Foundation, Inc., The Medical Foundation of North Carolina, Inc., The Educational Foundation Scholarship Endowment Trust, WUNC Radio, and the Athletic Depart­ment are each audited by a public accounting firm in addition to the State Auditor review. All audit reports are available for public inspection.
Certificateertificateertificateertificateertificateertificateertificateertificateertificateertificate Of Achievementchievementchievementchievementchievementchievementchievementchievementchievementchievement
The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achieve­ment for Excellence in Financial Reporting to the University for its comprehensive annual financial report for the fiscal year ended June 30, 2004. This was the 10th consecutive year that the University has been honored with this prestigious award. To receive a Certificate of Achievement, a government unit must publish an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both generally accepted accounting principles and applicable legal requirements.
A Certificate of Achievement is valid for one year. We believe our current comprehensive annual financial report continues to meet the Certificate of Achievement Program’s requirements and we are submitting it to the GFOA to determine its eligibil­ity for another certificate.
Acknocknocknocknowledgmentsledgmentsledgmentsledgmentsledgmentsledgmentsledgmentsledgmentsledgments
Preparation of this Comprehensive Annual Financial Report in a timely manner would not have been possible without the coordinated efforts of the University community, with special assistance from the Chancellor’s Office, the Office of the Ex­ecutive Vice Chancellor and Provost, Research and Economic Development, Student Affairs, Information Technology Services, University Advancement, University Relations, Institutional Research, the Office of Scholarships and Student Aid, the De­partment of Athletics, and Dr. James F. Smith, Adjunct Profes­sor of Business Administration in the Kenan-Flagler Business School. In addition, the Office of the State Auditor provided invaluable assistance.
Nancy D. Suttenfield
Vice Chancellor for Finance and Administration
CERTIFICATE OF ACHIEVEMENT Ten-time winner of report­ing excellence. 12 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
Carolina Covenant: Evolving as a National Model
In fall 2005, the University enrolled its second class of 346 Carolina Covenant Scholars, who represent nearly 10 percent of the total first-year class. Their enrollment followed an excellent first year for this program in which students posted less than a 2 percent attrition rate. The University also started a mentorship program for Covenant scholars that is being strongly supported by faculty volunteers.
Carolina Covenant scholars are admitted under the Carolina’s rig­orous admissions standards. Incoming Covenant students in 2005 posted an average 4.06 grade-point average and 1,222 Scholastic Aptitude Test score. That compares favorably with the rest of the 2005 class, the most academically prepared in UNC history.
Those developments follow the University’s expansion of this nationally recognized initiative to make a debt-free college education possible for more low-income students. The changes, announced by Chancellor James Moeser during his 2004 State of the University address, send an even stronger message about acces­sibility and the traditional commitment to opportunity in Chapel Hill for qualified students—regardless of their ability to pay.
Launched in fall 2004, the Carolina Covenant initially covered 224 freshmen (over 8 percent of the entering first-year class). Covenant students can graduate without debt. Instead, they agree to work on campus 10 to 12 hours weekly in a federal work-study job, and Carolina meets the rest of their needs through a combination of federal, state, University, and other privately funded grants and scholarships.
Beginning in fall 2005, students and their families must be at or below 200 percent of the federal poverty level—up from 150 percent. That raises the threshold to cover a family of four with an annual income of about $37,000 or a single parent with a child who makes about $24,000. In the program’s first year, those
Progress and Major Initiatives nitiatives : Fiscaliscaliscaliscaliscal 2004-2005
Carolina’s progress and major initiatives during fiscal 2004-2005 reflected the vision of becoming the nation’s leading public university. Following are a sampling of recent highlights demonstrating significant progress across many different areas of the University:
FUTURE CARDIOLOGIST “I am the first in my family to go to college. My aunt always told me, ‘You can make it.’ She encouraged me to excel in school and to do something to give back to the community, and her message was a powerful one. That is why I am interested in medicine. I think I’d like to be a cardiologist. After I graduate, I’m thinking of working in North Carolina so I can help the growing immigrant population and those who don’t speak English. Shirley Ort of UNC’s Office of Scholar­ships and Student Aid told me that I had been chosen for the Carolina Covenant. When she showed me my financial aid package, I almost cried to learn that everything had been planned for me, and that I could graduate with no debt. I had no idea that UNC had so many opportunities for students like me. The Carolina Covenant is a great opportunity for students who don’t have access to a lot of financial resources. Students have more of a feeling of security because they can pay for college while they’re in college, and not wait until they graduate to pay off their debt.”
Nayeli Lozada, Class of 2008
Carolina Covenant Student2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 13
income levels were at about $28,000 and $18,000, respectively.
Carolina was the first major public U.S. university to announce plans for such a program in fall 2004. Since then, several universi­ties, including Virginia, Maryland, Nebraska, Illinois, Harvard, and Brown have created or announced plans for similar programs.
The University consistently ranks among the national leaders in making education financially accessible to students. Carolina also meets the full need of middle-income students, with financial aid packages comprised of two-thirds grants and scholarships and one-third loans and work-study. (Most aid packages are closer to two-thirds loans and one-third grants.)
Average debt among graduating seniors who borrowed was $11,751 in 2004. In 2003, that number was $11,519, down from $13,700 in 2000. Less than a quarter of the University’s graduat­ing students accumulated debt. By contrast, the nation’s average student debt loan doubled to $18,900 in about a decade.
In 2005, the Board of Trustees approved devoting all proceeds from the sale of trademark-licensed University products (such as T-shirts and caps bearing the Tar Heel logo) to scholarships and financial aid. Previously, 75 percent of these funds had already been dedicated to need-based aid, providing much of the founda­tion for the Carolina Covenant. The rest of these funds are being dedicated to new merit-based scholarships. That action created 59 merit-based scholarships, and 53 of those were awarded to North Carolinians. Carolina saw an immediate increase—slightly more than 4 percent—in the yield rate of admitted North Carolina students deciding to attend Carolina.
Carolina First: Aiming Higher With New Goal
The Carolina First Campaign is a comprehensive, multi-year private fund-raising campaign—the largest in the University’s history—to support the vision of Carolina becoming the nation’s leading public university.
In October 2005, the campaign steering committee increased the goal from $1.8 billion to $2 billion. Now Carolina is one of just eight American universities seeking campaign goals of at least $2 billion. The others are UCLA, the universities of Chicago, Michi­gan, Virginia, and Washington, as well as Johns Hopkins and New York universities. Institutions completing campaigns of $2 billion or more since 1999 are Columbia, Duke, and Harvard universi­ties, the Massachusetts Institute of Technology, and the Univer­sity of Southern California.
By October 2005, Carolina First had brought in $1.56 billion, 78 percent of the new goal, while being about three-quarters complete. The campaign created 151 endowed professorships for faculty toward a goal of 200, and 523 scholarships and fellowships for students out of the goal of 1,000. Those funds are part of the gifts and pledges that include $628 million to be added to Car­olina’s endowment. Generous donors have funded new faculty research, new academic programs and initiatives as well as new buildings and renovations. In setting the Carolina First Campaign goal $200 million higher to $2 billion, the University is focusing on faculty support, merit-based scholarships, and capital projects. These are the three most pressing priorities that affect Carolina’s ability to compete with peer campuses.
Total giving in fiscal 2005 was $192.5 million in gifts and private grants, breaking Carolina’s single-year record of $192.4 million, set in 2004. This total counts only cash and assets received out­right. Including pledges and deferred gifts, commitments totaled $244.8 million, topping 2004’s $236 million.
Major gifts and pledges announced in fiscal 2005 included:
$3 million from Charlie Loudermilk, chairman and chief executive officer of Aaron Rents, Inc., to expand executive education facilities at the Rizzo Conference Center, part of the Kenan-Flagler Business School.
$600,000 from alumnus and former U.S. Ambassador An­thony S. Harrington and his wife, Hope. That completed a $1.6 million endowment fund to support the Institute of Latin American Studies in the College of Arts and Sciences.
$2.37 million from the Gary W. Parr Family Foundation in New York City to establish the Parr Center for Ethics in the department of philosophy. Gary W. Parr, a 1979 alumnus, is deputy chairman of Lazard Freres & Co LLC, in New York. The Parr Center is the public face of the University’s com­mitment to ethics.
A $7.1 million pledge from the Ithaca, N.Y.-based Triad Foundation will fund the Roy H. Park Fellowship program n
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DISORDER SPECIALTIST The Carolina First Campaign brought Cyn­thia Bulik to Carolina as the William R. and Jeanne H. Jordan Distin­guished Professor of Eating Disorders. She holds the nation’s only endowed chair devoted to the study and treatment of eating disorders, and just one of two in the world. She also directs the Southeast’s first comprehensive eating disorders program at UNC Hospitals.
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he Campaign forThe UNIVERSITY of NORTH CAROLINAat CHAPEL HILLCAROLINA14 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
in the School of Journalism and Mass Communication from 2005-06 through 2009-10.
The Charlotte-based Bank of America Foundation gave $900,000 to the Carolina Covenant, as well as $100,000 to the Center for Banking and Finance in UNC's School of Law. Pepsi Bottling Ventures LLC was another major con­tributor to the Carolina Covenant, providing $1.5 million.
The James M. Johnston Trust of Chevy Chase, Md., gave $2.1 million to student aid programs. n
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For the eighth time in 12 years, the development office won the Council for Advancement and Support of Education/Wealth ID Award for superior fund raising. No other university—public or private—has won the award as many times.
Carolina First is the private complement to the generous public support that North Carolina’s voters and legislators have shown for the University. In 2000 North Carolina voters approved $510 mil­lion in bond funding for repair, renovations, utilities, infrastructure, and new buildings at Carolina. Carolina First is helping leverage that bond money by making good on Chancellor Moeser’s pledge to state citizens to triple it through private gifts. In all, the University plans to invest another $1 billion in non-state funds for additional buildings essential to continued excellence.
Campus Master Plan: Steering Rapid Growth
The campus master plan is guid­ing the next several decades of an aggressive renovation and build­ing program at Carolina. The plan shows where and how to place future buildings. It identifies trans­portation and utility corridors and suggests ways to protect open space and meet key environmen­tal standards covering topics such as storm water runoff. The plan also recognizes the importance of enhancing the intellectual climate and the valuable University cul­ture of collegiality and collabora­tion.
Fiscal 2004-2005 marked the fourth year of master plan imple­mentation. The Board of Trustees approved the plan in 2001 after three years of work involving the University, consultants, and Town of Chapel Hill represen­tatives. Later joint town-gown discussions led to a new zoning ordinance and the rezoning of the main campus. A development plan approved by the town in 2001 included details on proposed development and strategies to mitigate community impacts. The University reached agreements with the town about two separate modifications to the campus de­velopment plan in 2003-2004.
BUILDING IN SUSTAINABILITY Below: The common area in front of the new Rams Head Center combines key elements of the campus master plan including promoting a pedestrian-oriented campus. Underneath the quad lies state-of-the-art storm water management technology—another key aspect of the master plan’s sustainability component. The center provides recreation, dining, and parking facilities as well as a grocery store. To the left: Sports Cafe in the Rams Head Center. Above: The Rams Head Center exterior. 2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 15
By mid-2005, the University had advanced the bond referen­dum project schedule to achieve completion six months ahead of the baseline target. Overall, the current construction program, exceeding $1.5 billion, represents the equivalent of building Wake Forest University in the middle of the active Chapel Hill campus.
Related accomplishments included:
36 projects completed (21 percent of the total program) within budget and on schedule. Total value: $310 million.
42 projects under way (50 percent of the program) all within budget, and 40 ahead of or on schedule. Total value: $750 million.
64 projects in design (29 percent of the program). Total value: $440 million.
Cash flow met projections.
The University also began a process to update the campus master plan as the main campus approaches complete build out and finished a report of the Chancellor’s Task Force on Landscape Heritage and Plant Diversity.
Other highlights included the following:
The Historically Underutilized Business (HUB) Resource Center’s participation rate is 14.6 percent overall, leading the UNC System. The University awarded $120.24 million worth of HUB contracts.
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Continued emphasis on transportation strategies such as park-and-ride lots, fare-free transit, Zip Cars, and a nation­ally recognized commuter alternative program, for which participation continued to increase—by 25 percent in 2004-05 alone.
Advanced key master plan projects, including Rams Head Center, a linchpin in the plan that combines a 700-space parking deck, dining and student recreation facilities, and innovative sustainability practices. Other recently completed projects include the Health Sciences Library, which will foster collaboration among scientists and educators, and Car­rington Hall, which doubled the School of Nursing’s space and became the UNC System’s first building to be certified for Leadership in Energy and Environmental Design by the U.S. Green Building Council.
Ribbon-cuttings held in fall 2005 included the newly renovated Memorial Hall, the Michael Hooker Research Center in the School of Public Health, and the 440 West Franklin Street Building renovation. Ground also was broken for the North Carolina Cancer Hospital, a $180 million facility being built by the UNC Health Care System.
n Other projects under way include: first phases of the Carolina Physical Science Complex; Global Educa­tion Center; renovation of Bur­nett-Womack and Medical Sciences Research Building addition and renovation (School of Medicine); Genetic Medicine Building (schools of medicine and pharmacy); student family housing; Campus Y; Infor­n
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ARTS HOME Memorial Hall, resplendent after a three-year, $18 million transformation, reopened in September 2005 with the launch of an exciting new Carolina Performing Arts Series featuring over 700 artists. Violinist Itzhak Perlman, left, was among the performers during the reopening ceremonies.
LOOMING CRANE A tower crane looms over the construction site for the Global Education Center off Mc­Cauley Street. The center—the result of the Higher Education Bond Refer­endum and private gifts—is a visible and tangible symbol of the Univer­sity’s commitment to being engaged internationally.16 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
mation Technology Services Building; and infrastructure improvements (chilled water, utilities, and steam plant).
Academic Plan: Guiding the Future
The University’s strategic focus and priorities build upon the academic plan completed and endorsed by the Board of Trustees in 2003. The plan, developed through a campus task force, guides the University’s decisions about investments in the academic enterprise in the short term. It is tied with parallel efforts to develop a rolling five-year financial plan, which tracks priority initiatives and projects expected costs and funding sources. These initiatives range from faculty compensation to library needs to information technology infrastructure improvements.
The academic plan’s six key priorities are:
Provide the strongest possible academic experiences for un­dergraduate, graduate, and professional students.
Further integrate interdisciplinary research, education, and public service.
Improve faculty recruitment, retention, and development.
Increase diversity among faculty, students, and staff.
Enhance public engagement.
Extend Carolina’s global presence, research, and teaching.
The plan is dynamic and will be reviewed and revised as new op­portunities and challenges emerge. The Provost’s Office complet­n
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ed an update summarizing action steps taken to follow through on plan recommendations in July 2005.
Faculty Research: Growing Excellence
Carolina faculty conduct research that creates new knowledge and useful technologies as well as pumps hundreds of millions of dollars into the North Carolina economy. These advances, combined with teaching and public service, make the University an educational and economic beacon for the state.
Research funding has risen steadily at Carolina for more than two decades, making Chapel Hill one of the top U.S. public universi­ties in research support and creating jobs through new products and spin-off companies. The faculty attracted $579 million in total contract and grant funding in fiscal 2005—up slightly. The National Institutes of Health (NIH) is Carolina’s central funding source, and the faculty ranked 15th overall in 2004 with nearly $290 million in total NIH funding.
Positive growth in the University’s overall research funding cor­responds with a decision made in mid-1998 by the North Carolina, General Assembly to permit the University to retain all overhead receipts generated by research.
Ongoing research initiatives include efforts to tackle challenges such as genome sciences, which is unraveling the mysteries of DNA and the human genome. Carolina has committed at least $245 million over a decade to be at the forefront of the genomics revolution. Led by renowned genetics scientist Terry Magnuson, the initiative repre­sents a public-private investment that includes a $25 million anony­mous gift creating the Michael Hooker Center for Proteomics to study a specialized area of genetics. One result of the initiative is the School of Public Health’s selection by the U.S. Centers for Disease Control and Prevention to house one of three U.S. centers for excellence for genom­ics and public health.
Since 2000, the University has main­tained a strategy of targeted investment in “big idea” research themes, knitting together existing strengths in various areas to create broad, interdisciplinary new thrusts.
FACULTY EXCELLENCE Above: Dr. Barry M. Popkin, professor of nutrition, directs a new obesity center funded by the National Institutes of Health. The center represents part of Carolina’s success in competing for research grants as part of the NIH’s “Roadmap for Medical Research.” Left: Assistant Professor Daniel Reichart, and his team of undergraduate and graduate students measured the distance of an explosion scientists de­termined to be the farthest ever detected: a gamma-ray burst from the edge of the visible universe. Junior Josh Haislip, far right, was the first to analyze the data from a telescope UNC helped build in Chile. Others, from left to right, were seniors Chelsea MacLeod and Justin Kirschbrown along with graduate student Melissa Nysewander.2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 17
Recent examples of key new interdisciplinary initiatives include:
The Renaissance Computing Institute (RENCI), created by Chancellor’s Eminent Professor of Computer Science Dan Reed, addresses problems spanning the sciences and engi­neering, the arts, the humanities, and commerce. RENCI, with broad collaboration with Duke, N.C. State, and the private sector, envisions multidisciplinary collaborations through the application of leading-edge technologies.
In the past year RENCI launched projects in ocean model­ing, biology, medicine, and other disciplines with state and national collaborations. RENCI participated in a Duke-N.C. State-UNC proposal for a National Center for Evolutionary Biology that was funded by the National Science Founda­tion. In addition, RENCI proposed the Carolina Center for Exploratory Genetic Analysis that was funded by the National Institutes of Health. With support from the Of­fice of the President, UNC created a bioinformatics portal to advance scientific discovery and biomedical education. RENCI partnered with the Health Sciences Library to cre­ate a high-performance visualization wall and collaboration facility in the newly renovated library—a first in the nation. n
The “Roadmap for Medical Research” initiative, intended to focus future NIH funding in 21 broad areas of concentra­tion. The University established a Roadmap Office led by a faculty member to position the campus for the highest level of success. This NIH initiative encourages researchers to at­tack difficult problems using interdisciplinary collaboration and sophisticated computational techniques to create quick translations to patient care.
As a result of the work of the Roadmap Office and the strength of Carolina’s faculty and their interdisciplinary work, Chapel Hill was the only university to receive eight of 21 grants in the fall 2005 Roadmap competition. This funding so far totals $15.5 million and includes starting the Carolina Center of Nanotechnology Excellence, which will marry expertise in nanotechnology with patient research at the Lineberger Comprehensive Cancer Center. Last year, Carolina also received three of the 21 initial Roadmap grants—more than any other university.
The Carolina Entrepreneurial Initiative, funded with a five-year, $3.5 million grant from the Ewing Marion Kauffman Foundation is being matched two-to-one by the University. UNC is one of seven Kauffman Foundation-designated “Entrepreneurial Universities,” chosen through a national competition. Carolina is deploying new programs to create a surge of entrepreneurship among students, faculty, and staff, including a new minor in entrepreneurship in the College of Arts and Sciences. The program is led by a team from an array of disciplines and managed by the Frank Hawkins Ke­nan Institute of Private Enterprise. Successful entrepreneurs, many of them alumni, are advisors, lending their real-world expertise.
The Office of Economic and Business Development (OEBD) matches faculty and campus expertise and resources with economic development issues facing North Carolina and its communities and organizations. This office is led by Jesse White, Jr., who headed the Appalachian Regional Commission and the Southern Growth Policies Board.
During its first year of operations, OEBD worked within the University to develop a network of faculty interested in economic development work in North Carolina. It also worked on several economic development projects in the state, including Carolina’s response to the state’s success­ful bid to have Credit Suisse First Boston locate a major facility in the Research Triangle Park area. At the announce­ment ceremony, the company stated that the assets of North Carolina’s universities were a deciding factor in locating in North Carolina.
Technology: Promoting Economic Development
Among the University’s goals in the research arena are to transfer new technologies into the consumer marketplace, resulting in increased economic value for North Carolinians as well as income for inventors and the University.
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START-UP Xintek is one of Carolina’s newest start-up companies spawned from faculty research and innovation. It is based on an invention by Otto Zhou, Lyle Jones professor of physics and materials sciences in the College of Arts and Sciences. He is developing a new method of medical X-ray imaging based on pulsed nanofibers. The system can capture images of the body or a specific organ while they are moving. The result is more precise and sensitive X-rays.18 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
Key accomplishments included the following:
Faculty filed 113 invention disclosures with the campus
Office of Technology Development.
119 patent applications were filed, and 25 new U.S. patents were issued to the University. That brought the total of U.S. and foreign patents held by Carolina to 655.
31 inventions were licensed.
Licensing income totaled $1.98 million.
Among the recent, promising inventions from Carolina research is an experimental anti-HIV drug being developed by Panacos Pharmaceuticals. Phase II clinical trials have been successfully completed. The drug was developed by Carolina researcher Kuo-Hsiung Lee, Kenan professor of natural products in the School of Pharmacy. Its central compound was discovered in an herb grown in Taiwan but is also found in the bark of birch trees across North America.
Faculty discoveries and innovations have resulted in the creation of 25 UNC spin-off companies and about 281 jobs. For example, Otto Zhou, Lyle Jones professor of physics and materials sciences in the College of Arts and Sciences, is developing a new method n
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of medical X-ray imaging based on pulsed nanofibers. The system can capture images of the body or a specific organ while they are moving. The result is more precise and sensitive X-rays. Zhou’s invention led to a start-up company, Xintek.
Other examples of commercialization leading to spin-offs include therapeutic agents for Parkinson’s Disease, technologies for drug delivery to treat cancer, industrial applications for carbon nanotubes, and gene therapy treatment for diseases like muscular dystrophy.
Carolina North: Tapping the Full Potential
The University’s future contributions to the North Carolina economy one day will include Carolina North, to be built on 900 acres of UNC-owned land less than two miles from main campus.
Carolina North will redefine the University’s engagement with the state, nation, and world. University leaders intend to create a vibrant, innovative setting for outreach and service, research collaborations with private industry and public agencies, and economic development for North Carolina.
The University advanced its conceptual plan for Carolina North in the past year. A new economic impact study projects that completion of the first two phases of Carolina North by 2020 will create over 7,500 permanent high-wage jobs for North Car­olinians. That means $433 million in annual salary and personal
CAROLINA NORTH This artist’s rendering shows a quadrangle view of Carolina North, planned on University-owned land less than two miles from main campus. An economic impact study projects that completion of the first two phases of Carolina North will create over 7,500 permanent jobs. That means $433 million in annual salary and personal income and $600 million in annual business revenue.2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 19
income and $600 million in annual business revenue. Construc­tion will create 9,000 jobs, $353 million in personal income, and $979 million in business revenue. Carolina North should generate $48 million in recurring tax revenue.
The study confirmed that Carolina North has the potential to position the University as a leading national center for public-private partnerships and to be a catalyst for the state’s economic transformation.
A separate three-year Horace Williams Airport site study by an aviation engineering and consulting firm examined possible alternate airport sites to accommodate Medical Air Operations (MedAir). That work included an analysis of the costs of mov­ing MedAir to Raleigh-Durham International Airport to enable development of Carolina North.
In addition, during its meeting on May 26, 2005, the Board of Trustees unanimously endorsed the University’s vision for Caro­lina North.
Academic Reputation: Highlighting
Rankings and Leadership
Several national publications and reports ranked Carolina promi­nently during fiscal 2005 in categories ranging from academic quality to affordability to diversity to entrepreneurship to interna­tional presence.
Highlights included the following:
5th best public university in U.S. News & World Report’s 2006 “Best Colleges” guidebook. Affirmation as a national leader in student accessibility; 1st among public campuses and 10th overall in “Great Schools, Great Prices,” based on academic quality, net cost of attendance and average stu­dent debt. 5th among publics for “least debt.” 54% of course sections enrolled fewer than 20 students — a key UNC measure of excellence.
Kenan-Flagler Business School: tied for 5th among under­graduate programs; tied for second among public campuses.
4th among public universities in “The Top American Research Universities,” produced in December 2004 by the Lombardi Program on Measuring University Performance at the Uni­versity of Florida. Based on categories such as research, en­dowment assets, private giving, faculty, and advanced training.
1st among the 100 best public colleges combining great aca­demics and affordable tuitions as ranked by Kiplinger’s Personal Finance. Carolina has been first four consecutive times.
A “best value” among 81 schools chosen for “America’s Best Value Colleges, 2006 Edition” by The Princeton Review/Random House for outstanding academics, relatively low costs, and generous financial aid packages. Carolina has appeared in this publication two years in a row.
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1st for the top entrepreneurial campus and 5th “most con­nected.” according to The Princeton Review and Forbes.com. UNC has an undergraduate business degree offering with a concentration in entrepreneurship in the Kenan-Flagler Business School, a new minor in entrepreneurship in the College of Arts and Sciences, and a new Carolina Entre­preneurial Initiative. In 2000, UNC became the nation’s largest university requiring undergraduates to own laptop computers. With more than 850 wireless access points, UNC provides wireless connectivity in classrooms, labs, libraries, residence halls, and quadrangles.
1st among public research universities, for the second con­secutive year, recording the highest rate of undergraduates studying abroad in 2002-2003; 7th among all research univer­sities for the total number of undergraduates going abroad, according to an annual report published by the Institute of International Education.
1st among U.S. academic institutions recognized as “best places to work for postdocs,” according to The Scientist mag­azine. Based on conditions for postdoctoral fellows working n
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PICTURESQUE SUNSET The sun sets over the campus, creating a dark outline of the Bell Tower.
20 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
in the life sciences as part of the magazine’s third annual survey. Carolina was 6th among all U.S. institutions, including government institutions and private research centers.
“Hottest” for health careers, according to the Kaplan/News­week 2005 “How to Get into College” guide, based on admis­sions trends and interviews with a broad array of educators, admissions officers, students and other longtime observers of the admissions process. An article in the guide says UNC’s diverse offerings in the health disciplines — all in the same place — are helping attract prospective students.
14th — the highest ranking for any major public research university — in the 2004 “Black Enterprise-DayStar Top 50 Colleges and Universities for African Americans” list. This ranking was based on responses to questions about which schools were both a good academic and social fit for African-Americans.
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One of the nation’s top universities in fostering social responsibility and public service, according to The Princeton Review and Campus Compact. Carolina appears in a book, “Colleges With a Conscience: 81 Great Schools With Outstand­ing Community Involvement.” Based on admissions practices, scholarships rewarding community service, and support for service-learning programs.
Among the 20 very “best buy” public universities in the U.S. and Canada as judged by the 2005 Fiske Guide to Colleges based on the quality of the academic programs in relation to the cost of attendance.
n Degree programs or specialty areas from the schools of business, education, law, medicine, pharmacy, public health as well as the College of Arts and Sciences appeared prominently in the Spring 2005 edition of U.S. News & World Report’s “American’s Best Graduate Schools” issue. Highlights included medicine, overall primary care, 2nd, over­all research, tied for 23rd; pharmacy, 3rd for Pharm.D. doctoral program; Kenan-Flagler Business School’s MBA program, tied for 21st, law, tied for 27th; education, tied for 27th; sociology, tied for 4th; history, tied for 13th; political science, tied for 13th; English, tied for 19th; and psychology, tied for 22nd.
n Kenan-Flagler Business School appeared in several other recent best MBA program lists. They included Business Week, 16th; Forbes, 14th; The Wall Street Journal, 9th based on a survey of corporate recruiters; The Finan­cial Times, 7th; and Hispanic Business, 5th, among top business schools for Hispanics. The school’s international executive educa­tion program was ranked 17th overall by The Financial Times. The school was included in a new Princeton Review book,“Best 143 Business Schools,” and the MBA program was ranked 6th for best campus environment, 10th for best professors and 10th for most family friendly.
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MBA PROGRAM Business Week magazine ranked UNC Kenan-Flagler’s Executive MBA Program fifth. UNC gradu­ates were surveyed and gave high marks for teaching quality by a top-notch faculty, the team-based environment, and a re­sponsive staff.
SCHOLAR Right: Rachel Mazyck of Laurel, Md., a 2002 Caro­lina graduate, won a 2005 Rhodes Scholarship to Oxford University in England. She became the 38th winner from Carolina since 1902. UNC ranks second among U.S. public universities in numbers of Rhodes Scholars produced. 2005 was one of the university’s most suc­cessful years ever for undergraduates awarded prestigious national and international scholarships.2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 21
BOARD OF TRUSTEES
Richard T. Williams
Chair, Charlotte, NC
Nelson Schwab III
Vice Chair, Charlotte, NC
Jean Almand Kitchin
Secretary, Scotland Neck, NC
Timothy B. Burnett
Greensboro, NC
Philip G. Carson
Asheville, NC
Russell M. Carter
Wilmington, NC
John G. B. Ellison, Jr.
Greensboro, NC
Paul Fulton, Jr.
Winston-Salem, NC
Karol V. Mason
Atlanta, GA
Roger L. Perry, Sr.
Chapel Hill, NC
A. Donald Stallings
Rocky Mount, NC
Robert W. Winston III
Raleigh, NC
Seth M. Dearmin
Ex-Officio, Chapel Hill, NC
James C. Moeser
Chancellor
Richard A. Baddour
Director of Athletics
Robert J. Cannon
Equal Opportunity/ADA Officer
Nancy K. Davis
Associate Vice Chancellor for University Relations
Douglas S. Dibbert
President, General Alumni Association
Archie W. Ervin
Associate Provost for Diversity and
Multicultural Affairs
Kevin M. FitzGerald
Special Assistant to the Chancellor
for State Government Relations
Bernadette Gray-Little
Dean, College of Arts and Sciences
Margaret A. Jablonski
Vice Chancellor for Student Affairs
Brenda W. Kirby
Secretary of the University
Matthew G. Kupec
Vice Chancellor for University Advancement
Jerome A. Lucido
Vice Provost for Enrollment Policy and Management
Daniel A. Reed
Vice Chancellor for Information Technology
and Chief Information Officer
William L. Roper
Vice Chancellor for Medical Affairs and
Dean, School of Medicine
Robert N. Shelton
Executive Vice Chancellor and Provost
Leslie Chambers Strohm
General Counsel
Nancy D. Suttenfield
Vice Chancellor for Finance and Administration
Tony G. Waldrop
Vice Chancellor for Research and Economic Development
CHANCELLOR’S CABINET 22 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
The University of North Carolina at Chapel Hill
Organi zationation Chart hart hart hart hart hart hart hart hart hart
Board of Trustees Chair
Richard T. Williams
Chancellor
James C. Moeser
Executive Vice
Chancellor and Provost
Robert N. Shelton
Vice Chancellor for
Student Affairs
Margaret A. Jablonski
Vice Chancellor for Research and
Economic Development Tony G. Waldrop
Vice Chancellor for Medical Affairs
William L. Roper
Vice Chancellor for Finance and Administration
Nancy D. Suttenfield
General Counsel
Leslie Chambers Strohm
Vice Chancellor for Information Technology
Daniel A. Reed
Vice Chancellor for University Advancement
Matthew G. Kupec
Director of Athletics
Richard A. Baddour
Equal Opportunity/
ADA Officer
Robert J. Cannon
Internal Auditor
Phyllis C. PetreeFINANCIAL SECTION
Students enjoy a lecture on the quad at the south end of McCorkle Place.24 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 25
26 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
Introduction
Management’s discussion and analysis provides an overview of the financial position and activities of The University of North Caro­lina at Chapel Hill (the “University”) for the fiscal year ended June 30, 2005, with comparative information for the fiscal year ended June 30, 2004. Management has prepared the discussion and analysis to be read in conjunction with the financial statements and
accompanying note disclosures.
The University is a constituent institution of the 16-campus University of North Carolina System (UNC System), a component unit of the State of North Carolina and an integral part of the state’s Comprehensive Annual Financial Report. The financial reporting
entity for the financial statements is comprised of the University and 10 component units. Although legally separate, The University of North Carolina at Chapel Hill Foundation Investment Fund, Inc., UNC Investment Fund, LLC, UNC Management Company, Inc., The University of North Carolina at Chapel Hill Foundation, Inc., The Kenan-Flagler Business School Foundation, The School of
Social Work Foundation, Inc., and U.N.C. Law Foundation, Inc. are reported as if they were part of the University. The Medical Foun­dation of North Carolina, Inc., The Educational Foundation Scholarship Endowment Trust, and the University of North Carolina at Chapel Hill Arts and Sciences Foundation, Inc. are legally separate, non-profit, tax-exempt organizations that are reported as discretely presented component units based on the nature and significance of their relationship to the University.
Management’s discussion and analysis includes a separate section regarding the three component units that are discretely reported in the financial statements. The remainder of the management’s discussion and analysis pertains to the University and the seven compo­nent units reported as part of the University.
Financial Highlights
The University’s financial position at June 30, 2005 remained strong with total assets of $3.8 billion. Net assets, which represent the residual interest in the University’s assets after deducting liabilities, were $2.6 billion at June 30, 2005. The University’s net assets in­creased by $367 million in fiscal year 2004-2005, when operating, non-operating, and other changes are included. A comparison of the total assets, liabilities, and net assets at June 30, 2005 and 2004 and a comparison of the major components of the changes in net assets for the two fiscal years is presented below:
Net assets increased 16.4 percent at June 30, 2005 over the prior year. Total assets increased 10.8 percent and total liabilities increased less than one percent for the same period. Operating revenues increased at the same rate as operating expenses in 2004-2005 over the prior year, 4.9 percent. Net non-operating revenues and expenses increased 12 percent in 2004-2005 over the prior year. The state appropriations growth of 6.9 percent was significant, given the previous, lesser rates of increase. Investment income growth remained strong with a 14.4 percent increase in 2004-2005
management
’s discussion and analysis analysis analysis analysis analysis
4,000,000,000
3,000,000,000
2,000,000,000
1,000,000,000
0
2005 2004
Total Assets Total Liabilities Net Assets
Statement of Net Assets
3,760,963,429
2,607,879,263
1,153,084,16666
3,393,709,194
2,241,199,157
1,152,510,037
Statement of Revenues, Expenses
and Changes in Net Assets
2,500,000,000
2,000,000,0001,500,000,0001,000,000,000500,000,0000#1#2,500,000,000
2,000,000,000
1,500,000,000
1,000,000,000
500,000,000
0
2005 2004
1,157,001,367
68
4,361,024
366 ,68 0,106
1,68681,900,696
207,218,411
2,500,000,0002,000,000,0001,500,000,0001,000,000,000500,000,0000#1#Capital Gifts & Grants and Endowments
Non-operating Revenues, net
Operating Revenues
Increase in Net Assets
Operating Expenses
1,102,637,321
6
11,015,308
216,013,557
1,603,385,712
105,746,6402005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 27
over the prior year. Research funding, fund raising for operational and capital needs, and construction funding through the North Carolina Higher Education Bond Referendum of 2000 continued to be posi­tive factors in the improved financial well-being of the University.
Using the Financial Statements
The financial statements have been prepared in accordance with Gov­ernmental Accounting Standards Board (GASB) principles. Begin­ning with the fiscal year ended June 30, 2002, the financial statements have been based on the provisions of GASB Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments, as amended by GASB Statement No. 35, Basic Financial Statements – and Management’s Discussion and Analysis – for Public Colleges and Universities. The full scope of the University’s activi­ties is considered to be a single business-type activity and accordingly, is reported within a single column in the basic financial statements.
Effective for the fiscal year ended June 30, 2005, the University imple­mented GASB Statement No. 40, Deposit and Investment Risk Disclo­sures – an amendment of GASB Statement No. 3. The statement provides disclosures that inform readers about deposit and investment risks that could impact the entity’s ability to provide services and meet its financial obligation. Among the issues addressed are common deposit and investment risks related to credit risk, concentration of credit risk, interest rate risk, custodial credit risk, and foreign currency risk.
The University’s Comprehensive Annual Financial Report includes the following three financial statements.
Statement of Net Assets
Statement of Revenues, Expenses, and Changes in Net Assets
Statement of Cash Flows
Management’s discussion and analysis provides information regarding each of these financial statements.
Other important characteristics of the financial statements in­clude the following:
Net assets represent the excess of total assets over total liabilities. There are three classes of net assets – unrestricted, restricted (non-expendable and expendable), and invested in capital assets net of related debt.
Assets and liabilities are categorized as either current or non- current. Current liabilities are due within one year, and current assets are those assets available to pay current liabilities.
Revenues and expenses are categorized as either operating or non-operating, and a net income or loss from operations is displayed. State appropriations, noncapital gifts and grants, and investment income are non-operating revenues, which results in a net loss from operations.
Tuition and fees revenues are reported net of scholarships and n
n
n
n
n
n
n
fellowships that are applied to student accounts. The “scholarship discounts” reduce the tuition and fees revenues and the scholar­ship and fellowship expenses by equal amounts. Scholarships and fellowships paid directly to students continue to be reported as expenses.
Expenses are reported in the financial statements by natural clas­sification such as salaries and benefits, supplies and materials, and other categories. Presentation by program classification such as instruction, research, and public service are disclosed in the notes to the financial statements.
Purchases of capital assets are expensed over the asset’s useful life by the recognition of depreciation expense on the capital assets.
A Statement of Cash Flows using the direct method is reported.
Condensed Statement of Net Assets
The Statement of Net Assets presents the financial position of the University at the end of the fiscal year, includes all assets and liabilities of the University, and segregates the assets and liabilities into current and non-current components. Net assets represent the difference between total assets and total liabilities and are one indicator of the University’s current financial condition. The following table summa­rizes the University’s assets, liabilities, and net assets at June 30, 2005 and 2004.
Assets, Liabilities, and Net Assets
2005 2004 %
a
s Restated Change
Assets:
Current assets $856,015,143 $810,667,402 5.6
Non-current assets: Endowment investments 972,461,495 848,469,859 14.6
Other long-term investments 283,640,904 299,874,517 (5.4)
Capital assets, net 1,550,201,138 1,276,669,341 21.4
Other non-current assets 98,644,749 158,028,075 (37.6)
Total Assets 3,760,963,429 3,393,709,194 10.8
Liabilities: Current liabilities 420,350,366 401,819,861 4.6
Non-current liabilities: Funds held in trust for
p
ool participants 260,960,010 235,608,859 10.8
Long-term liabilities 440,422,863 482,557,455 (8.7)
Other non-current liabilities 31,350,927 32,523,862 (3.6)
Total Liabilities 1,153,084,166 1,152,510,037 0.0
Net Assets: Invested in capital assets,
n
et of related debt 1,017,382,707 855,739,608 18.9
Restricted: Non-expendable 378,234,148 328,735,341 15.1
Expendable 736,631,596 648,019,434 13.7
Unrestricted 475,630,812 408,704,774 16.4
Total Net Assets $2,607,879,263 $2,241,199,157 16.4
n
n
n
28 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
CURRENT ASSETS AND LIABILITIES
The Statement of Net Assets shows the University had total assets of $3.8 billion at June 30, 2005, an increase of 10.8 percent over the prior year. Working capital, which is current assets less current liabilities, was $435.7 million at June 30, 2005, an increase of 6.6 percent over the previous year. One significant factor causing the working capital improvement was the increase in short-term invest­ments resulting from increased expendable resources and investment returns.
Current assets are represented graphically below:
Cash and cash equivalents include cash in bank accounts, cash with fiscal agents, and cash invested through the State Treasurer of North Carolina.
Short-term investments include funds invested through an investment pool administered by the University.
Receivables include amounts due from students of the University, patients of the professional health-care clinics, governmental and private entities for contract and grant awards, donors for pledges of gifts, as well as accrued investment earnings.
Inventories represent goods for resale by auxiliary operations of the University.
Other current assets include student loans and amounts due from the State of North Carolina or its component units.
n
n
n
n
n
2004-2005
Total Current Assets: $856,015,143
2003-2004
Total Current Assets: $810,66667,402
Cashashash and and and and Shorthorthorthort-termtermtermterm Receivables eceivables eceivables eceivables eceivables eceivables eceivables eceivables eceivables eceivables eceivables Inventories nventories nventories nventories nventories nventories nventories nventories nventories nventories nventories Otherthertherther Currenturrenturrenturrenturrenturrent
Equivalents quivalents quivalents quivalents quivalents quivalents quivalents quivalents quivalents quivalents quivalents Investments nvestments nvestments nvestments nvestments nvestments nvestments nvestments nvestments nvestments nvestments nvestments nvestments Assetsssetsssetsssetsssets
$480,000,000
$420,000,000
$360,000,000
$300,000,000
$240,000,000
$180,000,000
$120,000,000
$60,000,000
$0
$455,492,447 $473,862,880
-3.9%
$262,743,899 $200,866,660
30.8%
$17,400,526 $15,588,257
11.6%
$6,453,831 $6,953,170
-7.2%
Current Assets - Comparative
$113,924,440 $113,396,435
0.5%2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 29
Current liabilities are represented graphically below:
Accounts payable and accrued liabilities include payables to vendors, accrued payroll costs, and retainage on construction contracts.
Deferred revenue is primarily gifts through the planned giving program and represents the calculated remainder after annuity obliga­tions to beneficiaries are determined based on the terms of the gift annuity, charitable trust, or other planned giving arrangement.
Obligations under reverse repurchase agreements are liabilities incurred as part of the University’s investment management program.
The current portion of long-term liabilities includes bonds payable, notes payable, capital leases payable, annuity payable, and com­pensated absences (accrued vacation leave).
Other current liabilities include amounts due to the State of North Carolina or its component units, deposits and interest payable, funds held for others, and short term debt.
n
n
n
n
n
Accountccountccountccountccountccount Payable ayable ayable ayable ayable ayable ayable Deferredeferredeferredeferredeferredeferredeferred Obligationsbligationsbligationsbligationsbligationsbligationsbligationsbligationsbligationsbligations Under nder nder nder nder Currenturrenturrenturrenturrenturrent-portion portion portion portion portion portion portion portion Otherthertherther Currenturrenturrenturrenturrenturrent
& Accruedccruedccruedccruedccruedccrued Revenue evenue evenue evenue evenue evenue evenue Reverseeverseeverseeverseeverseeverse Repurchase epurchase epurchase epurchase epurchase epurchase epurchase epurchase epurchase epurchase Longongong-term term term term term Liabilitiesiabilitiesiabilitiesiabilitiesiabilitiesiabilitiesiabilitiesiabilitiesiabilitiesiabilities
Liabilities iabilities iabilities iabilities iabilities iabilities iabilities iabilities iabilities iabilities iabilities iabilities Agreements greements greements greements greements greements greements greements greements greements Liabilitiesiabilitiesiabilitiesiabilitiesiabilitiesiabilitiesiabilitiesiabilitiesiabilitiesiabilities
$160,000,000
$140,000,000
$120,000,000
$100,000,000
$80,000,000
$60,000,000
$40,000,000
$20,000,000
$0
$90,617,279 $77,819,675
16.4%
$33,351,813 $42,842,783
-22.2%
$0 $127,858,750
-100%
$145,474,087 $122,128,145
19.1%
$150,907,187 $31,170,508
384.1%
Current Liabilities - Comparative
2004-2005
Total Current Assets: $420,350,36666
2003-2004
Total Current Assets: $401,819,8686130 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
Endo wment and Other Long -term Investments
Endowment investments increased 14.6 percent during 2004-2005 and were $972.5 million at June 30, 2005 and $848.5 million at June 30, 2004, and include permanent endowments, funds in­ternally designated as endowments and similar funds such as gift annuities and charitable trusts. Net assets of endowment and similar funds were $930.6 million at June 30, 2005 and $801.3 million for the prior year.
The endowment assets are invested with The University of North Carolina at Chapel Hill Foundation Investment Fund, Inc. (the “Investment Fund”), which is reported as a governmental external investment pool in the financial statements. The Investment Fund is a 501(c)(3) non-profit corporation established to support the Uni­versity by operating an investment pool for charitable, non-profit foundations, associations, trusts, endowments, and funds that are organized and operated primarily to support the University.
Effective January 1, 2003, the assets of the Investment Fund were contributed and assigned to the UNC Investment Fund, LLC (“System Fund”), a North Carolina limited liability company organized and operated to invest member’s assets contributed and assigned to it from time to time by the Investment Fund and by The University of North Carolina and its constituent institutions and their related endowments and tax-exempt foundations. All or substantially all of the assets of the Investment Fund are expected to be invested in the System Fund. Separate, audited financial statements for the Investment Fund and System Fund are available. Refer to Note 1A to obtain the separate financial statements. The investment returns noted below refer to the pooled investment fund in existence for that time period.
The net assets of the endowment are categorized as restricted non-expendable, restricted expendable, or unrestricted.
Restricted non-expendable net assets include permanent endowments for which the donor has stipulated that the principal shall remain inviolate and be invested in perpetuity to generate earnings that can be expended consistent with the purposes specified in the gift instrument.
Restricted expendable net assets include internally designated endowments established by the University with restricted gifts and the undistributed earnings of permanent endowments.
Unrestricted net assets include internally designated endow­ments established by the University with unrestricted funds.
The investment objective is to earn an average real total return of at least 5.5 percent per year, net of all fees, over rolling five- and ten-year periods. The earnings distribution policy is to provide a stable source of spending support that is sustainable over the long term while preserving the purchasing power of the endowment. The earnings distribution rate was established at 5 percent of the previ­ous year’s market value, with annual increases based on inflationary factors. Each year’s distribution is subject to a 4 percent floor and a 7 percent cap based on estimated fiscal year-end market value.
n
n
n
Other long-term investments of $283.6 million at June 30, 2005 in­clude funds of $246.2 million of affiliated entities that are not part of the University’s financial reporting entity but do invest through the System Fund, and bond reserves and related funds of $37.4 million.
Most of the University’s endowment assets are managed within the System Fund, a pooled investment fund vehicle. The System Fund is designed to provide long-term, stable rates of return on the invested assets through the use of a highly diversified portfolio strategy. The nominal return on the endowment assets invested in the System Fund for fiscal year 2004-2005 was 15.5 percent, with a real return of 13 percent after inflation. The respective returns for fiscal year 2003-2004 were 16 percent and 12.8 percent. The System Fund return of 15.5 percent for 2004-2005 exceeded the Strategic Investment Policy Portfolio (“SIPP”) return of 13.8 percent by 1.7 percent. The System Fund’s return also exceeded the 70 percent S&P 500 / 30 percent Lehman Brothers Bond Index (“70/30”) return of 6.6 percent for the year.
The strong investment performance of the past two years has in­creased the three-year compound return to 11.5 percent at June 30, 2005. This three-year return measure compares well with the cor­responding measure of 10.3 percent for the SIPP and 7.8 percent for the 70/30. The System Fund is very well positioned in the current environment and remains invested according to the approved invest­ment policy that provides excellent diversification in both bull and bear markets.
Capitalapitalapitalapitalapitalapital Assetsssetsssetsssetsssets andandand Debtebtebt Managementanagementanagementanagementanagementanagementanagementanagementanagement
A critical aspect for enhancing and maintaining the University’s academic, research, and service programs and its residential life is the development and renewal of its capital assets. The University Board of Trustees approved the campus master plan to guide the University’s physical development in the 21st Century. The master plan meshes the critical pieces needed for smart growth in the 21st Century – transportation, parking, housing, utilities, and environ­mental sustainability – with the program needs of a growing campus. The master plan combines the practical requirements of a research university with the beauty that inspired its founders. The University will grow dramatically in the coming years.
A summary of changes in capital assets is disclosed in Note 5. Capital assets, net of accumulated depreciation, at June 30, 2005 and June 30, 2004 were as follows:
Capital Assets
%
2005 2004 Change
Construction in progress $377,522,418 $219,339,291 72.1
Land and other
non-depreciable assets 86,347,452 85,103,216 1.5
Buildings 798,180,554 703,546,321 13.5
General infrastructure 202,593,509 187,589,810 8.0
Machinery and equipment 85,557,205 81,090,703 5.5
Total $1,550,201,138 $1,276,669,341 21.4 2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 31
The University is engaged in a $1.5 billion capital construction program that began in 2000 and will continue through the next four years. This program includes major capital renewal of existing buildings and infrastructure to address both deferred maintenance and programmatic needs.
Major projects completed in fiscal year 2004-2005 include the Rams Head Center, the Michael Hooker Research Center for the School of Public Health, the addition to and renovation of Memo­rial Hall, the Carrington Hall addition for the School of Nursing, the Health Sciences Library renovation, and the Kenan, McIver, and Alderman residence halls renovations. The Rams Head Center combines a major new facility for student life with a new 700-car parking deck. It includes a retail grocery store, new dining facil­ity with six different venues, new student recreation center with three court gymnasium, elevated running track, exercise room, and cardiofitness center. The buildings constructed on top of the parking deck form a new open space and pedestrian bridges which connect this facility to student residences to the south and north campus. The new open space incorporates a sophisticated storm­water management system to capture and reuse stormwater as irrigation for the landscape. The Michael Hooker Research Center, the addition to the School of Public Health, provides new research laboratories and office space, lecture hall and seminar rooms, and a new atrium to provide much-needed gathering space for the School of Public Health.
Memorial Hall was originally constructed in 1931 and is used extensively for student assemblies and performances, lectures, concerts, and traveling theatrical productions. The project provided air-conditioning and a larger stage with wing space, as well as modernized stage equipment and production needs. The Car­rington Hall addition provides teaching laboratories, faculty offices and lecture hall for the School of Nursing. The new addition also features a rooftop garden which incorporates a stormwater management system to capture and reuse stormwater as irrigation for the garden. This addition will be the first LEED (Leadership in Energy and Environmental Design) certified building at Carolina.
The renovation of the Health Sciences Library provided a compre­hensive renovation to this 1960’s facility including new mechanical, electrical, and telecommunications systems. New compact storage on the ground floor allowed for the addition of group study space and a new café. The renovations to the Kenan, McIver, and Alder­man residence halls provided a comprehensive renovation includ­ing new heating and cooling systems, telecommunication wiring, and new elevators. The buildings are now completely accessible and the living rooms have been restored.
Major projects under construction at June 30, 2005 include Phase I of the Carolina Physical Science Complex, Student Family Housing, Phase II of the Residence College capital program, the Medical Sciences Research Building addition and renovation, and renovations to Burnett Womack Building. Ma­jor infrastructure improvements continue as part of the master plan for capital development.
Research facilities are a critical component of the construction program, and fiscal year 2004-2005 brought substantial improve­ments to the physical infrastructure supporting research. Several key research facilities were renovated, including the entire Health Sciences Library, the 11th floor of Mary Ellen Jones Building, the School of Dentistry Building, and the historic 440 West Franklin Street building. Renovations were begun in Brauer Hall, Burnett Womack, and the Medical Research Building. The School of Nursing addition and the new School of Public Health’s Hooker Center are fully occupied, equipped and contributing to our research capacity.
The Science Complex will replace outdated, deteriorating build­ings with state-of-the-art facilities. It will provide an innovative learning atmosphere for students and open doors for integrated collaboration among Carolina’s scientists. The complex will house the University’s departments of chemistry, computer science, marine sciences, mathematics, physics, and astronomy, and a new Institute for Advanced Materials, Nanoscience and Technology. The Science Complex Phase 1 is under way and both Phase II and III are projected to bid this year.
The 36 completed projects total $310 million, or 21 percent of the $1.5 billion capital construction program. The 42 projects under construction total $750 million or 50 percent, and the 64 projects under design represent $440 million or 29 percent. Capital funds resulting from North Carolina Higher Education Bonds continue to provide essential resources for construction. The University is directly investing in its capital construction program using a variety of other funding sources including University bonds, cost reimbursements from research grants, internal reserves, and private gifts. Previous changes in state legislation allowed the University to pledge a broader stream of revenues as security for its debt obligations, and general revenue bonds are issued to finance capital construction. The general revenue pledge results in a stronger, more flexible security that captures the strengths of not only the University’s auxiliary and student-related revenues, but also its research programs.
In December 2003, the University issued $108 million in fixed-rate bonds to finance certain capital construction projects. The University continues to use its commercial paper program that provides low-cost bridge financing for capital projects until gifts are received or in anticipation of an external bond issue. Com­mercial paper debt was $141.1 million at June 30, 2005 and $8.8 million at June 30, 2004. The commercial paper program and the general revenue bonds allow the University to use a central bank concept for funding capital projects. The University issues fixed and variable rate debt externally, and blends the average borrowing rate to allocate debt costs to individual capital projects and campus divisions. This concept provides a stable and flexible debt-funding source for capital projects.
The University maintains a combination of variable and fixed rate debt, consistent with its debt management policy. The effective, combined interest rate for variable and fixed rate debt was 4.5 percent for fiscal year 2004-2005 and 4.36 percent for 2003-2004. The interest rate on the commercial paper program for fiscal year 2004-2005 was 1.82 percent and for 2003-2004 was 0.98 percent. 32 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
Interest rates on the University’s variable rate, long-term bonds were 1.82 percent for fiscal year 2004-2005 and one percent for 2003-2004. Interest rates on fixed rate, long-term bonds are disclosed in Note 8B of the financial statements. The University’s financial strength allowed it to achieve ratings of AA+/Aa1 by the national rating agencies. The University debt service to op­erations ratio, a measure of an entity’s dependence on borrowed funds, was only 2.2 percent at June 30, 2005 and 2.1 percent for the prior year.
Other Non -current Assets
Other non-current assets were $98.6 million at June 30, 2005 and $158 million at June 30, 2004, a 37.6 percent decrease. Included in this category at June 30, 2005 are restricted cash and cash equivalents of $3.9 million, receivables for pledged gifts of $30.3 million, notes receivable for student loans of $29 million, restrict­ed resources due from the primary government of $27.1 million, and an investment in a joint venture of $8.3 million.
The decrease in other non-current assets from the prior year resulted primarily from a $67 million decline in cash and cash equivalents. The decline resulted from the expenditure of note proceeds invested as a cash equivalent for the Student Family Housing construction project and the discontinued use of reverse repurchase agreements which are sales of securities with a simul­taneous agreement for repurchase.
Restricted resources due from the primary government represent receivables for designated capital construction projects funded from proceeds from statewide higher education bonds and other state resources. The investment in a joint venture represents the construction of the Southern Astrophysical Research Telescope (SOAR), situated in Cerro Pachon, Chile, in South America, as part of an international consortium including the University.
Non -current Liabilities
Non-current liabilities were $732.7 million at June 30, 2005 and $750.7 million at June 30, 2004 and include funds held in trust for the University’s affiliated foundations and other campuses in the UNC System and their affiliates of $261 million and $235.6 million respectively. These entities are not part of the University’s financial reporting entity but do invest through the System Fund. The increase in funds held in trust of 10.8 percent over the prior year resulted from strong investment performance and participant contributions.
Long-term liabilities of $440.4 million at June 30, 2005 and $482.6 million at June 30, 2004 are the non-current portion of bonds payable, notes payable, capital leases payable, com­pensated absences, and annuities payable. The decrease of 8.7 percent from the prior year resulted from principal payments on bonds. The reader may refer to Note 8 for summary of changes in long-term liabilities. Other non-current liabilities of $31.4 million at June 30, 2005 and $32.5 million at June 30, 2004 are refundable U.S. government grants that provide resources for student loan programs.
Net Assets
Net assets represent the value of the University’s assets after li­abilities are deducted. The University’s net assets were $2.6 billion at June 30, 2005, an increase of $367 million over the prior year.
The invested in capital assets, net of related debt category rep­resents the University’s land, buildings, general infrastructure, equipment, and other capital assets net of accumulated deprecia­tion and net of the outstanding bonds and other indebtedness on the facilities. The restricted non-expendable category includes the University’s permanent endowments funds. The restricted expendable category primarily includes restricted internally designated endowments, gifts, contract and grant awards, and dis­tributed endowment earnings. The unrestricted category includes unrestricted internally designated endowments, gifts, auxiliary operations, facilities and administrative funds (overhead receipts), and other unrestricted funds. While there are no externally im­posed restrictions on unrestricted funds, the funds are generally designated by the University for specific academic programs or capital needs.
Restricted Non-expendable
$378,234,148
15%
Unrestricted
$475,630,812
18%
Investment in Capital Assets,
net of related debt
$1,017,382,707
39%
Restricted Expendable
$736,631,596
28%
2005 Netet Assetsssetsssetsssetsssets: $2,607,879,2632005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 33
Condensed Statement of Revenues, Expenses, and Changes in Net Assets
The Statements of Revenues, Expenses, and Changes in Net Assets present the University’s results of operations. The statements for the fiscal year ended June 30, 2005 and the prior year are summarized as follows:
University Operations
%
2005 2004 Change
Operating Revenues:
Student tuition and fees, net $164,456,925 $153,943,215 6.8
Grants and contracts 524,476,342 499,798,678 4.9
Sales and services, net 462,459,945 443,227,663 4.3
Other 5,608,155 5,667,765 (1.1)
Total Operating Revenues 1,157,001,367 1,102,637,321 4.9
Operating Expenses:
Salaries and benefits 966,629,252 917,840,235 5.3
Supplies and materials 148,439,992 151,196,308 (1.8)
Services 407,689,396 380,125,640 7.3
Scholarships and fellowships 51,169,976 47,427,018 7.9
Utilities 47,870,170 46,207,389 3.6
Depreciation 60,101,910 60,589,122 (0.8)
Total Operating Expenses 1,681,900,696 1,603,385,712 4.9
Operating Loss (524,899,329) (500,748,391) 4.8
Non-operating Revenues (Expenses):
State appropriations 406,672,962 380,446,327 6.9
Non-capital grants 62,544,341 53,153,741 17.7
Non-capital gifts, net 73,692,797 68,517,192 7.6
Investment income, net 154,899,571 135,369,198 14.4
Interest and fees on
capital asset-related debt (21,822,928) (18,339,114) 19.0
Other non-operating
r
evenues (expenses) 8,374,281 (8,132,036) 203.0
Income Before Other Changes 159,461,695 110,266,917 44.6
Capital grants 152,844,246 74,392,000 105.5
Capital appropriations 5,165,922 897,387 475.7
Capital gifts 11,520,297 6,358,879 81.2
Additions to
permanent endowments 37,687,946 24,098,374 56.4
Increase in Net Assets 366,680,106 216,013,557 69.7
Net Assets – July 1 2,241,199,157 2,025,185,600 10.7
Net Assets – June 30 $2,607,879,263 $2,241,199,157 16.4
Fiscal year 2004-2005 revenues and other changes and expenses total $2,070,403,730 and $1,703,723,624, respectively.
Fiscal year 2003-2004 revenues and other changes and expenses total $1,845,870,419 and $1,629,856,862, respectively. 34 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
Operating perating Revenues
The operating revenues represent resources generated by the University in fulfilling its instruction, research, and public service missions. Student tuition and fees are reported net of the scholar­ship discount, which was $37.9 million for fiscal year 2004-2005 and $33.3 million for the prior year. Total revenues from student tuition and fees increased 6.8 percent over the prior year. The 2004-2005 tuition rates increased 8.5 percent for undergradu­ate residents, 10.1 percent for undergraduate non-residents, 7.9 percent for graduate residents, and 9.9 percent for graduate non-residents. There were also limited tuition increases for the professional schools. The revenue growth from the rate increases was offset by a shift in residency status among graduate students from non-resident to resident.
Revenues from grants and contracts increased 4.9 percent over the prior year as reflected in the financial statements. Discussion of grants and contracts in terms of awards provides another useful perspective. The University is among the nation’s leading public research universities, with a diversified portfolio of research that attracted more than $579 million in sponsored program awards during fiscal year 2004-2005, a 0.3 percent increase over the pre­vious year. During the same period, awards from the Department of Health and Human Services increased more than 4 percent to $338 million. During the federal fiscal year 2003-2004 (the latest available numbers), University faculty attracted $289.7 million in National Institutes of Health (NIH) awards, up from $271 mil­lion in 2003, ranking 15th overall among U.S. private and public universities. The University is the top public university in the South and one of only six Southern universities, public or private, cited in the NIH’s top 20. All five of the University’s health af­fairs schools – dentistry, medicine, nursing, pharmacy and public health – ranked within the top 20 of public and private institu­tions, according to the NIH. The University continues to rank in the top 20 educational institutions nationally in federal support for science and technology.
The NIH Roadmap committee and office established by the Office of the Vice Chancellor for Research and Economic Development, has been instrumental in supporting a number of new research initiatives that are geared toward new funding op­portunities at NIH. Last year, Carolina researchers received three of the 21 P-20 NIH Roadmap Awards offered nationally. The Citizen-Soldier Support Program coordinated by the University was initially funded through a $1.8 million Congressional award. The program facilitates practical and emotional support for North Carolina National Guard and Reserve soldiers and their families preparing for, during and after return from deployments. This initiative gives communities more ways to support military men and women and their families and shows that Carolina and its program partners connect with the citizens of this state and their needs.
Sales and services and patient services revenues of $462.5 million for fiscal year 2004-2005 represent an increase of 4.3 percent over the prior year and include the revenues of campus auxiliary operations such as student housing, student stores, student health services, the utilities system, and parking and transportation, as well as revenues from patient services provided by the profes­sional health-care clinics. Net revenues generated by the health-care clinics decreased 0.5 percent in 2004-2005. Although gross revenues from patient services net of the allowance for uncollect­ible accounts increased by 4.2 percent, the $17.7 million increase in indigent care and contractual adjustments caused the slight decrease in net revenues from patient services. Other revenues of $5.6 million for fiscal year 2004-2005 represent operating resources not separately identified and include, as examples, an assessment to the Investment Fund to support administrative ser­vices, library fines, and interest income from student loans.
Operating perating Expenses
The University’s operating expenses were $1.7 billion for the fiscal year ended June 30, 2005, an increase of 4.9 percent over the prior year. The operating expenses are reported by natural classification in the financial statements and by functional
classification in the note disclosures (Note 11). The following table illustrates the University’s operating expenses by the func­tional classification:
Operating Expenses by Function
%
2005 2004 Change
Instruction $575,951,072 $532,927,326 8.1
Research 271,208,156 257,945,228 5.1
Public Service 83,004,683 78,275,601 6.0
Academic Support 75,384,219 75,692,980 (0.4)
Student Services 21,652,715 20,487,890 5.7
Institutional Support 67,425,927 64,731,371 4.2
Operations and Maintenance
of Plant 92,860,245 87,890,864 5.7
Student Financial Aid 51,169,976 47,427,018 7.9
Auxiliary Enterprises 383,141,793 377,418,312 1.5
Depreciation 60,101,910 60,589,122 (0.8)
Total Operating Expenses $1,681,900,696 $1,603,385,712 4.9
The following graph illustrates the University’s operating ex­penses by function.2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 35
Operating expense categories reported by natural classification gen­erally increased or decreased at a comparable rate to total operating expenses. Salaries and benefits increased 5.3 percent in 2004-2005 over the prior year, expenses for services increased 7.3 percent, scholarships and fellowships increased 7.9 percent, and utilities increased 3.6 percent. Supplies and materials decreased 1.8 percent, and depreciation decreased 0.8 percent.
Non -operating operating Revenues and Expenses
State appropriations of $406.7 million, noncapital grants of $62.5 million, non-capital gifts of $73.7 million, investment income of $154.9 million, interest and fees on capital asset-related debt of ($21.8) million, and other revenues and expenses of $8.4 million comprise net non-operating revenues and expenses. These revenues are considered non-operating because they were not generated by the University’s principal, ongoing operations. For example, state appropriations were not generated by the University but were pro­vided to help fund operating expenses.
The University’s initial budget for state appropriations was $400.7 million for fiscal year 2004-2005. Budget increases of $17.5 million included funding of $10.4 million for salary and benefit increases for faculty and staff, $4.6 million for increased student enrollment including distance learning and other program enhancements, and $2.5 million for other initiatives. Budget reductions in state ap­propriations were $11.5 million. Included in the budget reductions was a $1.1 million decrease based on legislation which exempted the University from paying sales and use taxes which resulted in lowering operating expenses by a like amount. A budget reduction of $2.9 million was required in response to storm damage suffered throughout the state in August and September of 2004 resulting from hurricanes. The resulting appropriations of $406.7 million represented a 6.9 percent increase over fiscal year 2003-2004. The University uses an annual budget planning and hearing process with all deans and vice chancellors. The review process provides a frame­work to implement differential budget reductions.
Non-capital grants increased by 17.7 percent to $62.5 million in fiscal year 2004-2005 and represent federal awards that are not con­sidered to be operating revenues. Net non-capital gifts increased by 7.6 percent to $73.7 million and represent expendable gifts received and pledges made and are net of an allowance for uncollectible pledges. Net investment income of $154.9 million, an increase of 14.4 percent over 2003-2004, includes income and realized and unrealized gains and is net of realized and unrealized losses and investment management fees. For detail discussion, the reader may refer to Endowment and Other Long-term Investments section of Management’s Discussion and Analysis. Interest and fees on capital asset-related debt were ($21.8) million, an increase of 19 percent over the prior year.
Other non-operating revenues and expenses were $8.4 million and include a $6.6 million increase in the net assets of annuities and charitable remainder trusts. These annuities and charitable remain­der trusts include split-interest agreements that have a liability component for the present value of projected future distributions to the annuitant or donor and liabilities to other organizations where
Student Financial Aid
$51,169,976
3%
Auxillary Enterprises
$383,141,793
23%
Research
$271,208,156
16%
Academic Support
$75,384,219
4%
Student Services
$21,652,715
1%
Institutional Support
$67,425,927
4%
Instruction
$575,951,072
34%
Public Service
$83,004,683
5%
Depreciation
$60,101,910
4%
Operations
and Maintenance
of Plant
$92,860,245
6%
2005 OPERATING EXPENSES BY FUNCTION: $1,681,900,696
Depreciation
$60,101,910
4%
Scholarships
and Fellowships
$51,169,976
3%
Salaries and Benefits
$966,629,252
57%
Supplies and Materials
$148,439,992
9%
Services
$407,689,396
24%
Utilites
$47,870,170
3%
2005 OPERATING EXPENSES BY NATURE: $1,681,900,696
The following graph illustrates the University’s operating expenses by the natural classification.36 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
the University reporting entity serves as trustee but not the ben­eficiary of the split-interest agreements. Changes in the actuarial calculations of the liabilities will increase or decrease the net as­sets of the annuities and charitable remainder trusts. The increase in fiscal year 2004-2005 over the prior year resulted in part from net asset increases in these annuities and trust.
Total otal Operating perating and Non -operating operating Revenues
Operating and non-operating revenues such as state appropria­tions, noncapital grants, noncapital gifts, and investment income are used to fund University operations. The following chart illustrates the University’s operating and non-operating revenues which total $1.9 billion for fiscal year 2004-2005.
Other Changes in Net Assets
Capital grants of $152.8 million for 2004-2005 and $74.4 mil­lion for 2003-2004 are from statewide higher education bond proceeds for capital construction projects. Capital appropriations of $5.2 million for 2004-2005 and $0.9 million for the prior year were received from the state for repairs and replacements. Net capital gifts of $11.5 million for 2004-2005 and $6.4 million for the prior year resulted from fund-raising efforts and also provided funding for construction projects. Non-expendable gifts and funds from the state’s program to match gifts for distinguished professorship endowments resulted in additions to permanent endowments of $37.7 million during fiscal year 2004-2005 and $24.1 million during fiscal year 2003-2004.
Condensed Statement of Cash Flows
The Statement of Cash Flows provides additional information about the University’s financial results by reporting the major sources and uses of cash. Cash decreased by $85.3 million during the fiscal year 2004-2005, compared with an increase of $46.9 million during fiscal year 2003-2004. The primary factor which caused the decrease in the cash position at June 30, 2005 was the decreased use of the State Treasurer’s short-term investment fund (STIF), which is classified as a cash equivalent, for the University’s temporary investment pool. The temporary investment pool’s investment in STIF was $120 million at June 30, 2004 and zero at June 30, 2005. The statements for the fiscal year ended June 30, 2005 and the prior year are summarized as follows:
Cash Flows
2005 2004 %
a
s Restated Change
Cash Flows Provided (Used): Operating activities ($460,045,805) ($348,742,031) 31.9 Noncapital
financing activities 589,302,508 325,768,875 80.9
Capital and related
financing activities (67,227,484) (107,595,259) (37.5)
Investing activities (147,354,384) 177,517,901 (183.0)
Net Increase (Decrease)
in Cash (85,325,165) 46,949,486 (281.7)
Cash – July 1 544,687,966 497,738,480 9.4
Cash – June 30 $459,362,801 $544,687,966 (15.7)
Cash flows from operating activities include, as examples, cash received for tuition and fees or research grants and sala­ries paid to faculty or payments of invoices to vendors. Since state appropriations, gifts, and certain other revenues are not considered operating revenue, operating activities had a net cash outflow for both fiscal years.
Noncapital financing activities include state appropriations received for operations and noncapital gifts, and had a net cash inflow for both fiscal years. n
n
22%
8%4%3%1%
Student Tuition and Fees, net
$164,456,925
9%
Federal Grants and Contracts
$403,099,819
22%
Other Operating Revenues
$4,167,246
0%
Interest Earnings on Loans
$1,440,909
0%
Sales and Services, net
$290,397,166
16%
Patient Services, net
$172,062,779
9%
Nongovernmental
Grants and Contracts
$81,560,319
4%
State and Local Grants and Contracts
$39,816,204
2%
NON-OPERATING REVENUES $706,183,952
38%
(SEE BREAKDOWN BELOW)
State Appropriations
$406,672,962
22%
Noncapital Grants
$62,544,341
3%
Noncapital Gifts, net
$73,692,797
4%
Investment Income
(net of Investment Expense of $3,707,578) $154,899,571
8%
Other Non-Operating Revenues
$8,374,281
1%
NON-OPERATING REVENUES
2005 Totalotalotalotal Revenuesevenuesevenuesevenuesevenuesevenuesevenues By Sourceourceourceourceource:
$1,863,185,3192005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 37
The cash flows from capital and related financing activi­ties include the proceeds received from short-term and long-term debt obligations, the repayment of debt, and the acquisition and construction of capital assets.
The net cash outflows from investing activities include purchases and sales of equity securities and other investments as well as interest and dividends received. The significant change in the cash flows from investing activities resulted from additional investment purchases due to increased levels of gifts and other funds available for investment.
Component Units Reported
Using Discrete Presentation
Potential component units of the University, primarily the affili­ated fund-raising foundations, are evaluated to determine if the financial statements of the potential component unit should be:
a) combined with those of the University in the Comprehen­sive Annual Financial Report (CAFR),
b) reported separately (i.e., discretely) along with the Universi­ty’s financial statements in the CAFR, or
c) not reported in the CAFR.
Three affiliated foundations were categorized as component units using discrete presentation. Discrete presentation provides readers with complete information regarding the financial ac­tivities of the components units. The reader may refer to Notes 1A for additional information regarding the three affiliated foundations.
Summary information regarding the financial activities of the three affiliated foundations follows:
Total Net Assets
%
2005 2004 Change
Assets and Liabilities:
Total assets $431,586,835 $389,576,735 10.8
Total liabilities 2,165,737 2,387,485 (9.3)
Total net assets $429,421,098 $387,189,250 10.9
Net Assets Composition: Unrestricted $20,653,221 $17,723,823 16.5
Temporarily restricted 238,744,849 209,029,695 14.2
Permanently restricted 170,023,028 160,435,732 6.0
Total net assets $429,421,098 $387,189,250 10.9
Unrestricted net assets are expendable and do not have external restrictions regarding use of the resources, temporarily restricted net

THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
2005 COMPREHENSIVE
ANNUAL FINANCIAL REPORT
A Constituent Institution of the University of North Carolina System and a Component Unit of the State of North Carolina
Fiscal Year Ended June 30, 2005
Chapel Hill, North CarolinaTHE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
2005 COMPREHENSIVE
ANNUAL FINANCIAL REPORT
A Constituent Institution of the University of North Carolina System and a Component Unit of the State of North Carolina
Fiscal Year Ended June 30, 2005
Chapel Hill, North Carolina| THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
TABLE OF CONTENTS
3 Introductory Section
4 Message from the Chancellor
7 Letter of Transmittal
12 Progress and Major Initiatives
21 Board of Trustees
21 Chancellor’s Cabinet
22 Organization Chart
23 Financial Section
24 Report of the Independent Auditor
26 Management’s Discussion and Analysis
BASIC FINANCIAL STATEMENTS
40 Statement of Net Assets
42 Statement of Revenues, Expenses, and Changes in Net Assets
43 Statement of Cash Flows
45 Statement of Financial Position — Component Units
46 Statement of Activities and Changes in Net Assets — Component Units
47 Index to the Notes to the Financial Statements
48 Notes to the Financial Statements
74 Statistical Section
76 Schedule of Operating and Non-operating Revenues by Source
77 Schedule of Operating Expenses by Nature
78 Schedule of Operating Expenses by Function
80 Schedule of Ratios
86 Schedule of Specific Revenue and General Revenue Bond Coverage
88 Annual Undergraduate Educational Costs Per Student
90 Admissions
91 Enrollment
92 Degrees Earned
93 Faculty and Staff Statistics
95 Historical Statistical Section
96 Schedule of Unrestricted General and Restricted Funds Revenues by Source
98 Schedule of Unrestricted General and Restricted Funds Expenditures and Mandatory Transfers by Function
100 Schedule of Current Funds by Source
102 Schedule of Current Funds by Source Adjusted for Inflation
104 Schedule of Current Funds Expenditures and Mandatory Transfers by Function
106 Schedule of Ratios
114 Schedule of Gross Debt Service Coverage and Ratio of Debt Service to Current Expenditures INTRODUCTORY SECTION
Snow covers the north end of McCorkle Place, close to Franklin Street.| THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
We aspire for the University of North Carolina at Chapel Hill to become the nation’s leading public university. We want Carolina to be the best that it can be. In setting our sights so high, we are drawing upon our past as the nation’s first public university and our deep commitment to helping make North Carolina successful in the future. Our campus community, alumni, friends, and key volunteers embrace this ambitious vision for Carolina.
Recent accom­plishments show we are pointed down the right path for suc­cess. In fall 2005, the University enrolled the most academically prepared first-year class in our history. Nearly 10 percent of these students (346) were in our second class of Carolina Covenant Scholars. An unprecedented $1.5 billion construction and renovation program, believed to be the largest capital program on any U.S. campus, is making rapid progress. Over the past decade, faculty research fund­ing has increased significantly, affirming our status among the national research leaders in health care, science, and technology. Alumni and friends are giving generously to the Carolina First Campaign, whose volunteer leaders increased the goal to $2 billion.
Carolina is moving forward with tremendous momentum. Our challenge is to sustain that energy and focus it to best serve the people of North Carolina. Following are details about a few recent developments.
Carolina Covenant, Access, and Affordability
We were the first major American public university to promise a debt-free education to low-income students. The Carolina Cov­enant, now in its second year, is for eligible students and families at or below 200 percent of the federal poverty level. That covers a family of four making $37,000 annually or a single parent with a child at $24,000. We created a faculty volunteer mentor program so these students receive the support they need. Total attrition after our first year was less than 2 percent, a tribute to our first Carolina Covenant Scholars.
Carolina led the reversal of a national trend in which many universities diverted funds from need-based to merit-based pro­grams to compete for high-ability students. We challenged other campuses to make similar investments to ensure affordability and access for deserving students. Many responded including Virginia, Maryland, Michigan, Nebraska, Illinois, Harvard, and Brown. Serving these students remains part of the national debate about accessibility, and we are often asked to share Carolina’s perspective with national colleagues.
Few universities can declare, as we do, that they meet 100 percent of the demonstrated financial need of their students. Through the Carolina Covenant and an excellent overall finan­cial aid program, we are making college possible for qualified students without regard for family income. This commitment stems from strong state funding for financial aid across the UNC System as well as our own Board of Trustees’ policies, which stress extensive need-based aid (35 percent to 40 percent) when campus-based tuition rises.
Students from middle-class families do not bear the burden of higher tuition and costs. We meet all of their need. Average debt among graduating seniors who borrowed was $11,751 in 2004. In 2003, that number was $11,519, down from $13,700 in 2000. Less than a quarter of our graduating students accumulated debt. By contrast, the nation’s average student debt loan doubled to $18,900 in about a decade.
Our practices protect access and affordability. Among our
undergraduates, 33 percent received need-based financial grants in 2004-05. We met two-thirds of our undergraduates’ need with scholarships and grants and the remaining third with loans and work-study jobs. Traditionally, aid packages on other campuses are closer to two-thirds loans and one-third grants.
Enhancing Service to North Carolina
Aim of New Task Force
What is the role of a great university in a state that must compete in a global economy? If there is one thing I have learned in my travels to nearly 50 communities last year around the state, it is this: our University is deeply engaged in the issues that matter most to North Carolinians—their health, their economy, and their education. In every place I have visited I have seen our students, faculty and staff making a difference and touching people’s lives.
The Institute of Government, the Area Health Education Centers Program and the Carolina Center for Public Service are wonder­ful examples of our engagement with North Carolina.
But we can do more to match our resources with the state’s needs. We have convened a Chancellor’s Task Force on Engage­ment, and senior campus officers and leaders have joined me to consider new ways to mobilize resources. One special focus is
MESSAGE FROM THE CHANCELLOR
JAMES MOESER has severed as the chancellor of the Univesity since 2000.
If there is one thing I have learned in my travels to nearly 50 communities last year around the state, it is this: our University is deeply engaged in the issues that matter most to North Carolin­ians—their health, their economy, and their education. 2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT |
K-12 education and how we can help the state’s schools achieve dramatic gains in teaching and learning for all children. Other areas of emphasis include health care and economic development.
Faculty Compensation Remains Top Priority
Our number one priority remains attracting and retaining the finest faculty. As we benchmark ourselves against our national academic peers, we have worked hard to make up lost ground—to stay competitive with America’s and now the world’s best universities.
Last year, we raised money for 25 new endowed faculty chairs through the Carolina First Campaign. The General Assembly generously appropriated $8 million in recurring funds across the UNC System to match these gifts and doubled the amount to be matched by the state. Our share of these new state funds totaled $4.3 million, clearing the way for 18 of the 25 new chairs to be fully funded.
Carolina First Aims Higher—$2 Billion
The overwhelming success of our Carolina First Campaign is a tribute to the passion that our alumni and friends have for this University. In October 2005, our campaign steering committee increased the campaign’s goal from $1.8 billion to $2 billion to support the University’s vision of becoming the nation’s leading public university.
Now Carolina is one of just eight American universities seek­ing campaign goals of at least $2 billion. At this writing, Carolina First has secured more than $1.56 billion, 78 percent of the new goal, while being about three-quarters complete. We have created 151 endowed professorships for faculty and 523 scholarships and fellowships for students with funds that are part of the $628 mil­lion that has been raised in gifts and pledges for the University’s endowment. Donors have made possible new research, new aca­demic programs and initiatives, and helped pay for renovating and building new facilities. In setting the goal $200 million higher, we are focusing on faculty support, merit-based scholarships, and capital projects, the three most pressing priorities to keep Caro­lina competitive with our peers.
Faculty Research Funding Key to Future Success
Faculty research pumps hundreds of millions of dollars into the North Carolina economy and creates jobs through new products and spin-off companies. The faculty attracted $579 million in total contract and grant funding in fiscal 2005—up slightly. The National Institutes of Health is our central funding source, and we ranked 15th overall in 2004 with nearly $290 million.
This fall, Carolina became the nation’s only university to receive eight grants in the NIH “Roadmap for Medical Research” initia­tives. This effort encourages researchers to attack complex prob­lems using interdisciplinary collaboration and sophisticated com­putational techniques to create quick translations to patient care.
CAMPUS BEAUTY The beauty of the Carolina campus is one of the University’s major assets. The American Society of Landscape Architects selected the Carolina campus as one of the most beautifully landscaped spots in the country. That listing is typical of the praise the University receives affirming the charm of mighty oaks, majestic quadrangles, brick sidewalks, and other landscaping synonymous with Carolina.| THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
Following Carolina were Vanderbilt and Columbia, with six; Me­morial Sloan-Kettering Cancer Center with five; Johns Hopkins at four; Harvard and Stanford with three; and Duke with two. Our funding so far totals $15.5 million and includes starting the Carolina Center of Nanotechnology Excellence, which will mar­ry expertise in nanotechnology with patient research at the UNC Lineberger Comprehensive Cancer Center. Last year, Carolina also received three of the 21 initial Roadmap grants—more than any other university.
Major construction projects completed;
cancer hospital breaks ground
We have reached several milestones with the construction pro­gram over the past year. Here is a sampling of recent highlights:
Memorial Hall, resplendent after a three-year, $18 mil­lion transformation, reopened in September 2005 with the n
launch of an exciting new Carolina Performing Arts Series featuring over 700 artists. We have set a goal of a $10 million endowment to support this high level of program quality. A challenge grant of $5 million from the William R. Kenan, Jr. Charitable Trust will help us realize this objective.
The Michael Hooker Research Center more than doubled the School of Public Health’s research space with 31 new laboratories as well as high-tech conference rooms and classrooms. Faculty and students there are studying the link between nutrition and cancer risks, protecting the safety of our air and drinking water and searching for vaccines for infectious diseases.
Rams Head Center, a multi-purpose facility adjacent to Kenan Stadium, offers a student recreation facility, excellent dining opportunities, and a parking deck all built as part of a state-of-the-art, environmentally friendly complex. Rams Head is an important step in transforming the southern region into an integral part of campus.
We opened the Baity Hill and Mason Farm communities, located behind the Dean Smith Center, to house student families, many of whom are graduate students and postdoc­toral students serving as teaching assistants. These facilities replace Odum Village, now a transition space while residence halls are renovated.
We broke ground for the North Carolina Cancer Hospital, which will become a world-class hospital for cancer patients and their families from North Carolina and beyond. The new hospital will bring complete cancer care for patients and re­search facilities into one building and serve as the new clini­cal home for the UNC Lineberger Comprehensive Cancer Center. The General Assembly authorized $180 million to build this facility during the 2004 session.
Conclusion
2004-2005 was another successful year in Chapel Hill. We made excellent progress. Working closely with our trustees, we have set solid priorities that address our overarching vision of becoming America’s leading public university. The people of North Caro­lina and beyond deserve nothing less. We strive to ensure that everything our students, faculty and staff do—through teaching, research and public service—supports the objective of creating a model public university.
Sincerely,
James Moeser
UNC Chancellor
n
n
n
n
BREAKING GROUND Three-year-old cancer patient Reece Holbrook dem­onstrates his shovel skills at the groundbreaking for the North Carolina Cancer Hospital. Joining Reece were Chancellor James Moeser, State Senator Jeanne Lucas, and Dr. Richard Goldberg. The new hospital will bring complete cancer care for patients and research facilities into one building.2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT |
Introduction
This Comprehensive Annual Financial Report includes the financial statements for the year ended June 30, 2005, as well as other useful information that helps ensure the University’s accountability to the public. Responsibility for the accuracy of the information and for the completeness and fairness of its presentation, including all disclosures, rests with the University’s management. We believe the information is accurate in all material respects and fairly presents the University’s financial position, revenues, ex­penses, and other changes in net assets. We believe our system of internal controls is sound and suf­ficient to disclose material deficien­cies in controls to the auditors and the audit commit­tee. The Compre­hensive Annual Financial Report includes all disclosures necessary for the reader to gain a broad understanding of the University’s financial position and results of operations for the fiscal year ended June 30, 2005. The report is organized into three sections.
The Introductory Section includes a message from the chancellor, the transmittal letter, a listing of the University’s Board of Trustees, Chancellor’s Cabinet, and an organization chart. This section also features the University’s major recent initiatives, priorities, and prog­ress. Overall, this section provides background about the organization and structure of the University, the scope of its operations, significant factors contributing to the current fiscal environment, and expected factors influencing the future.
The Financial Section presents management’s discussion and analysis, basic financial statements, and a report of the Office of the State Auditor. Management’s discussion and analysis provides an objec­tive review of the University’s financial activities. The basic financial statements are prepared in accordance with accounting principles generally accepted in the United States of America as prescribed by the Governmental Accounting Standards Board.
The Statistical Section contains selected financial, statistical, and demographic information. This information provides a broad over­view of trends in the University’s financial affairs. Also included is historical statistical information reproduced from the 2004 Com­prehensive Annual Financial Report. In addition, the Statistical Section contains information on the Cost of College Project of the National Association of College and University Business Officers.
The accompanying financial statements present all funds belonging to the University and its component units. While the 16-campus University of North Carolina System’s Board of Governors has ultimate responsibility, the chancellor, the University’s Board of Trustees, and the Board of Trustees of the Endowment Fund have both delegated and statutory responsibilities for financial account­ability of the University’s funds. For the fiscal year ended June 30, 2005, the University implemented Governmental Accounting Standards Board (GASB) Statement No. 40, Deposit and Investment Risk Disclosures. This statement amends GASB Statement No. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements, to establish and modify disclosure requirements related to investment risks: credit risk (including custodial credit risk and concentrations of credit risk), interest rate risk, and foreign currency risk. This statement also establishes and modifies disclosure requirements for deposit risks: custodial credit risk and foreign currency risk.
The financial reporting entity for the financial statements is com­prised of the University and 10 component units. Although legally separate, The University of North Carolina at Chapel Hill Founda­tion Investment Fund, Inc. (Investment Fund), UNC Investment Fund, LLC (System Fund), UNC Management Company, Inc. (Management Company), The University of North Carolina at Chapel Hill Foundation, Inc., The Kenan-Flagler Business School Foundation, The School of Social Work Foundation Inc., and U.N.C. Law Foundation, Inc. are reported as if they were part of the University.
The Investment Fund supports the University by operating an investment fund for charitable, non-profit foundations, associations, trusts, endowments, and funds that are organized and operated pri­marily to support the University. The System Fund was organized to allow the University, the University of North Carolina and its constituent institutions (UNC System), affiliated foundations, as­sociations, trust, and endowments that support the University and the UNC System to pool their resources and invest collectively in investment opportunities identified, structured and arranged by the Management Company. The Investment Fund contributed and assigned all of its assets to the System Fund in exchange for membership interest in the System Fund. At year end, the Invest­ment Fund membership interest was approximately 93 percent of the System Fund total membership interest.
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November 30, 2005
To Chancellor Moeser, Members of the Board of Trustees, and Friends of The University of North Carolina at Chapel Hill:
NANCY SUTTENFIELD has served as vice chancellor for finance and administration for the University since 2000.
We believe the information is accurate in all material respects and fairly presents the University’s financial position, revenues, expenses, and other changes in net assets. We believe our system of internal controls is sound and sufficient to disclose material deficiencies in controls to the auditors and the audit committee.| THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
The Management Company is organized and operated exclu­sively to support the educational mission of the University. The Management Company also provides investment management services to the University, UNC System, and affiliated tax-exempt organizations. The purpose of UNC-CH Foundation, Business School Foundation, Social Work Foundation, and Law Founda­tion is to aid, support, and promote teaching, research, and service in the various educational, scientific, scholarly, professional, artis­tic, and creative endeavors of the University.
The financial statements of the Investment Fund, System Fund, Management Company, UNC-CH Foundation, Business School Foundation, Social Work Foundation, and U.N.C. Law Founda­tion have been blended with those of the University.
Separate financial statements for three other component units are reported based on GASB Statement No. 39. The Medical Foundation of North Carolina, Inc., The Educational Foundation Scholarship Endowment Trust, and The University of North Car­olina at Chapel Hill Arts and Sciences Foundation, Inc. are legally separate, not-profit, tax-exempt organizations and are reported as discretely presented component units based on the nature and significance of their relationship to the University.
Other related foundations and similar non-profit corporations for which the University is not financially accountable are not part of the accompanying financial statements. The University of North Carolina at Chapel Hill is a constituent institution of the 16-campus University of North Carolina System, which is a component unit of the State of North Carolina and an integral part of the State’s Comprehensive Annual Financial Report.
Economic Condition and Outlook
According to a June 23, 2005, release from the Bureau of Eco­nomic Analysis (BEA) of the U.S. Department of Commerce, the gross state product (GSP) of North Carolina in 2004 was $335.4 billion or 2.9 percent of the total $11.6 trillion for the entire U.S. The North Carolina increase was 6.3 percent from 2003, which was slightly below the 6.6 percent national average. This result meant that North Carolina was the 11th largest economy among all states in 2004. Georgia was 10th at $340.7 billion and Virginia was 12th at $326.6 billion.
Total personal income in North Carolina was $250.3 billion in 2004, according to a BEA release of September 28, 2005. This was an increase of 6.7 percent from the revised $234.5 billion of 2003. This increase was well above the 6 percent national average. The BEA release indicated that personal income in North Caro­lina was running at a seasonally adjusted annual rate of $265.8 billion in the second quarter of calendar year 2005. This was an increase of 7.4 percent from the second quarter of 2004, which compares quite favorably with the national average increase of 6.5 percent for the same period.
The state budget situation has been affected by the economy for over five years now. One big reason, which North Carolina shares with 20 other states, is that nonfarm payroll employment has yet to recover from the 2001 recession. According to the Bureau of Labor Statistics (BLS) of the U.S. Department of Labor, total nonfarm payroll employment on a seasonally adjusted basis hit its all-time peak of 3,967,500 jobs in January 2001, which was just before the start of the recession in March. According to the BLS state and regional employment release of September 16, 2005, there were 3,892,300 such jobs in North Carolina in August 2005. This represents a decline of 75,300 jobs or 1.9 percent from the peak. Only five states (South Carolina, Illinois, Ohio, Mas­sachusetts, and Michigan) have had a greater decline over the past four years than what North Carolina has experienced.
However, the employment picture from the household survey, a completely different measure of employment in the U.S., is much more optimistic. The previous peak was 3,989,425 people employed in January 2001 on a seasonally adjusted basis. That was first exceeded in December 2003 and every month since then has been above the previous peak. According to the September 16, 2005 BLS release, there were 4,095,572 people employed in North Carolina in August on a seasonally adjusted basis. That was 106,147 more people employed or a 2.7 percent increase from the January 2001 level. It was also up 57,772 people, or 1.4 percent, from August 2004.
The increase from the previous peak ranks North Carolina eleventh in the U.S. in total net employment gains over the post-2001 recession period, just below Nevada and just above Pennsylvania. This means that many more people have become self-employed in North Carolina over the past four years. The robust increases in personal income over this period suggest that most of them have been successful.
Consensus forecasts are for the U.S. economy to grow about 3.5 percent in real (adjusted for inflation) terms in calendar year 2006. North Carolina should manage real GSP growth of about 4 percent. That would be a welcome improvement in the overall economic situation.
Progress and Major Initiatives
Carolina’s progress, priorities, and major initiatives during fiscal year 2004-2005 reflected the University’s vision of becoming the nation’s leading public university. Following this letter are high­lights from fiscal year 2004-2005.
Financial Information
Internal Control Structure
The University’s Finance and Administration Division establishes and maintains an effective system of internal control. One objec­tive of an internal control structure is to provide management with reasonable, although not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition. Another objective is to ensure that transactions are executed in accordance with appropriate authorization and recorded properly in the financial records to permit the preparation of financial statements in accordance with generally accepted accounting principles. Organizational structure, policies, and procedures have 2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT |
been established to safeguard assets, ensure the reliability of ac­counting data, promote efficient operations, and ensure compli­ance with established governmental laws, regulations and policies, University policies, and other requirements of sponsors to whom the University is accountable.
As a recipient of federal financial awards, the University is re­sponsible for ensuring compliance with all applicable laws and regulations. A combination of state and University policies and procedures, integrated with the University’s system of internal controls, provides for this compliance. As an integral part of the State of North Carolina’s Single Audit, the University is subject to an annual examination by the Office of the State Auditor of its federal financial assistance programs and federal cost-reimburse­ment contracts in accordance with U.S. Office of Management and Budget Circular A-133, Audits of State and Local Govern­ments, and Non-Profit Organizations.
The University determined a course of action as part of higher education’s reponse to the Sarbanes-Oxley Act and has imple­mented practices to enhance the internal control structure. The University’s focused effort on financial controls provides a more proactive and broader approach in identifying and resolv­ing potential limitations on sound internal control through a self-assessment process, development of a professional code of ethics, targeted campus training sessions, special reviews, im­proved documentation of internal controls, and timely and useful responses to questions from campus units. A financial controls manager leads efforts to strengthen and maintain sound internal controls. The Audit and Finance Committee of the Board of Trustees maintains an Audit Committee charter consistent with higher education standards.
Budgetary udgetary udgetary Controls
The University is responsible for controlling its budget and using the funds to fulfill its educational, research, and public service missions. It is also responsible for planning, developing, and con­trolling budgets and expenditures within authorized allocations in accordance with University, state, and federal policies and pro­cedures. The University maintains budgetary controls to ensure compliance with provisions embodied in the annual appropriated budget approved by the North Carolina General Assembly, and as further directed by the Board of Governors. Project-length financial plans are adopted for capital projects.
After the budget has been approved by the chancellor and the Board of Governors, the University follows an established system of budgetary controls. Finance and Administration issues periodic interim budget statements to department heads to guide them in managing their budget allocations. Monthly financial reports are provided on each fund to individual managers responsible for the fund. Financial reports are also provided to the state. When actual conditions require changes to the budget, revisions are prepared, and these revisions are appropriately approved and communi­cated to those affected. Changes to the budget are approved at the University level and/or the state level as required. Based on the state’s management flexibility legislation, the University has received delegated authority for designated budget changes. The University maintains an encumbrance accounting system as another method to ensure that imposed expenditure constraints are observed.
Debt Administration dministration
To ensure the appropriate mix of funding sources is utilized, the University established a debt policy, which is continuously used by management as a tool to evaluate the University’s organiza­tional and capital funding structure, the appropriate use of lever­age, and internal lending mechanisms.
To fulfill its mission, the University will need to make capital investments, driving capital decisions that affect the University’s credit. Appropriate financial leverage serves a useful role and should be considered a long-term component of the University’s balance sheet. Just as investments represent an integral compo­nent of the University’s assets, debt is viewed to be a continu­ing component of the University’s liabilities. Debt, especially tax-exempt debt, provides a low-cost source of capital for the University to fund capital investments and achieve its mission and strategic objectives.
The debt strategies, combined with management judgment, provide the framework by which decisions will be made regard­ing the use and management of debt. The objectives of the debt policy are:
Identify projects eligible for debt financing. Using debt to fund mission-critical projects will ensure that debt capacity is optimally used to fulfill Carolina’s mission. Projects that relate to the core mission will be given priority for debt financing; projects with associated revenues will receive
priority consideration as well.
Maintain Carolina’s favorable access to capital. Management’s determination of the timing of capital projects will not be compromised by the University’s access to capital sources, including debt. Management will use and issue debt to
ensure timely access to capital.
Limit risk of University debt portfolio. The University will manage debt on a portfolio basis. The University’s continu­ing objective to achieve the lowest cost of capital will be balanced with the goal of limiting exposure to market shifts.
Manage the University’s credit to maintain the highest acceptable credit. This practice will permit the University to continue to issue debt and finance capital projects at favorable interest rates while meeting strategic objectives. The University will limit its overall debt to a level that will maintain an acceptable credit rating with the bond rating agencies.
In meeting these objectives, the University has adopted strategies and procedures for the management of its debt. These strategies include the following:
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10 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
Mission-Based Capital Planning. Provide framework with a link to mission to evaluate and prioritize debt-eligible projects.
Core Ratios. Adopt a set of core ratios to guide capital planning and ensure central oversight of University-wide leverage levels.
Financial Instruments. Provide management with appropri­ate debt vehicles based on borrowing needs.
Asset/Liability Management. Manage outstanding debt and future debt-financing needs within the framework of sound portfolio management practices.
The University has $456.1 million of outstanding long-term bonds and $141.1 million of commercial paper at June 30, 2005. The bonds were issued to finance the construction and/or renovation of many campus facilities including es­sential new research buildings, major new cultural facilities that will benefit the local community and state, undergraduate residence halls, student family housing, and parking facili­ties. Principal and interest for the bonds are payable from the general revenues of the University - excluding state appro­priations, tuition, restricted gifts and restricted income from endowment investments - and net revenues generated by the operations of the debt-financed facilities.
The UNC-CH Foundation, which is part of the University’s financial reporting entity, also adheres to a debt policy that maximizes the utility of the foundation’s financial resources
to continue to provide current and future support to the University.
Cashashash Managementanagementanagementanagementanagementanagementanagementanagementanagement
The cash management plan of the University provides guidance to ensure control and deposit of receipts, appropriate manage­ment of disbursements, and investment of funds to maximize earnings on the investment of cash and minimize nonproductive cash balances. State law requires that state-appropriated funds be deposited and invested with the State Treasurer with investment earnings accruing to the state. Other resources, such as gifts, contract and grant awards, auxiliary revenues, and student activ­ity fees are not appropriated by the state. These funds, except for fees from services of health-care clinics, must be deposited and invested with the State Treasurer with investment earnings accruing to the University. Endowment, debt service, fees from services of health-care clinics, and other designated funds are invested by the University in accordance with its investment policies.
The University administers a short-term investment pool for funds not required to be on deposit with the State Treasurer. The investment pool is administered in conjunction with cash receipts and disbursing requirements to minimize idle cash and to generate current income without loss of capital at a rate of return no less than the State Treasurer. Earnings are distributed n
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to participating funds.
The objective in managing disbursements is to maintain funds in interest-bearing accounts for the longest appropriate period of time while ensuring that payments for goods and services are made timely. Disbursement cycles are established to coincide with this objective. The University uses the state’s cash man­agement control system to improve cash flow by electronically recording cash receipts and disbursements for funds deposited with the State Treasurer. Other electronic processes have been developed for the receipt and disbursement functions to provide efficient and effective processes.
Riskiskisk Managementanagementanagementanagementanagementanagementanagementanagementanagement
Risk has traditionally been viewed as something to be avoided or eliminated with only a negative outcome. Increasingly in today’s environment, risk is more broadly defined as any issue that affects an organization’s ability to meet its objectives. There is also greater awareness that responsible risk taking leads to a competitive advantage and can maximize stakeholder value.
To optimize the benefits of risk and minimize their costs, the University has taken a more enterprise-wide approach to its risk management programs by holistically addressing its opera­tional, financial, compliance, strategic and reputation risks. This enterprise risk management framework ensures that decisions that trade value and risk are made on an informed basis and are aligned with our risk tolerance and strategy. Addressing our full portfolio of risks is also a critical element of our strategic plan­ning process. During the past year, the Enterprise Risk Manage­ment Advisory Committee began assessing the University’s most critical risk drivers. This ongoing process allows us to prioritize and efficiently use our risk management resources.
Included within this enterprise risk management framework is our responsibility to mitigate any business interruption that adversely affects our education, research, and public service missions. An effective campus-wide continuity plan is central to this responsibility. Therefore, the committee’s charter has been expanded to include a Business Continuity Plan. Moving forward, we intend to build from our past business continu­ity success and develop a more robust, campus-wide Business Continuity Plan.
Insurable risks are addressed in several ways, including par­ticipation in various state-administered risk pools, purchase of commercial insurance, and self retention of certain risks. Refer to Note 14 of the Notes to the Financial Statements for more detailed information concerning the University’s insurance programs.
Other Information
Auditsuditsuditsuditsudits
State law, federal guidelines, and certain bond covenants require that the University’s accounting and financial records be audited 2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 11
by the Office of the State Auditor each year. The University’s Internal Auditors also perform fiscal, compliance, and perfor­mance audits. The reports resulting from these audits are shared with University management. Internal and external audit re­ports are provided to the Audit and Finance Committee of the Board of Trustees.
The audit of the University’s federal financial assistance pro­grams is performed by the Office of the State Auditor in conjunction with the statewide Single Audit. The accounting and financial records of The University of North Carolina at Chapel Hill Foundation Investment Fund, Inc., The Univer­sity of North Carolina at Chapel Hill Foundation, Inc., UNC Investment Fund, LLC, UNC Management Company, Inc., The Kenan-Flagler Business School Foundation, The School of Social Work Foundation, Inc., The U.N.C. Law Foundation, Inc., the University of North Carolina at Chapel Hill Arts and Sciences Foundation, Inc., The Medical Foundation of North Carolina, Inc., The Educational Foundation Scholarship Endowment Trust, WUNC Radio, and the Athletic Depart­ment are each audited by a public accounting firm in addition to the State Auditor review. All audit reports are available for public inspection.
Certificateertificateertificateertificateertificateertificateertificateertificateertificateertificate Of Achievementchievementchievementchievementchievementchievementchievementchievementchievementchievement
The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achieve­ment for Excellence in Financial Reporting to the University for its comprehensive annual financial report for the fiscal year ended June 30, 2004. This was the 10th consecutive year that the University has been honored with this prestigious award. To receive a Certificate of Achievement, a government unit must publish an easily readable and efficiently organized comprehensive annual financial report. This report must satisfy both generally accepted accounting principles and applicable legal requirements.
A Certificate of Achievement is valid for one year. We believe our current comprehensive annual financial report continues to meet the Certificate of Achievement Program’s requirements and we are submitting it to the GFOA to determine its eligibil­ity for another certificate.
Acknocknocknocknowledgmentsledgmentsledgmentsledgmentsledgmentsledgmentsledgmentsledgmentsledgments
Preparation of this Comprehensive Annual Financial Report in a timely manner would not have been possible without the coordinated efforts of the University community, with special assistance from the Chancellor’s Office, the Office of the Ex­ecutive Vice Chancellor and Provost, Research and Economic Development, Student Affairs, Information Technology Services, University Advancement, University Relations, Institutional Research, the Office of Scholarships and Student Aid, the De­partment of Athletics, and Dr. James F. Smith, Adjunct Profes­sor of Business Administration in the Kenan-Flagler Business School. In addition, the Office of the State Auditor provided invaluable assistance.
Nancy D. Suttenfield
Vice Chancellor for Finance and Administration
CERTIFICATE OF ACHIEVEMENT Ten-time winner of report­ing excellence. 12 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
Carolina Covenant: Evolving as a National Model
In fall 2005, the University enrolled its second class of 346 Carolina Covenant Scholars, who represent nearly 10 percent of the total first-year class. Their enrollment followed an excellent first year for this program in which students posted less than a 2 percent attrition rate. The University also started a mentorship program for Covenant scholars that is being strongly supported by faculty volunteers.
Carolina Covenant scholars are admitted under the Carolina’s rig­orous admissions standards. Incoming Covenant students in 2005 posted an average 4.06 grade-point average and 1,222 Scholastic Aptitude Test score. That compares favorably with the rest of the 2005 class, the most academically prepared in UNC history.
Those developments follow the University’s expansion of this nationally recognized initiative to make a debt-free college education possible for more low-income students. The changes, announced by Chancellor James Moeser during his 2004 State of the University address, send an even stronger message about acces­sibility and the traditional commitment to opportunity in Chapel Hill for qualified students—regardless of their ability to pay.
Launched in fall 2004, the Carolina Covenant initially covered 224 freshmen (over 8 percent of the entering first-year class). Covenant students can graduate without debt. Instead, they agree to work on campus 10 to 12 hours weekly in a federal work-study job, and Carolina meets the rest of their needs through a combination of federal, state, University, and other privately funded grants and scholarships.
Beginning in fall 2005, students and their families must be at or below 200 percent of the federal poverty level—up from 150 percent. That raises the threshold to cover a family of four with an annual income of about $37,000 or a single parent with a child who makes about $24,000. In the program’s first year, those
Progress and Major Initiatives nitiatives : Fiscaliscaliscaliscaliscal 2004-2005
Carolina’s progress and major initiatives during fiscal 2004-2005 reflected the vision of becoming the nation’s leading public university. Following are a sampling of recent highlights demonstrating significant progress across many different areas of the University:
FUTURE CARDIOLOGIST “I am the first in my family to go to college. My aunt always told me, ‘You can make it.’ She encouraged me to excel in school and to do something to give back to the community, and her message was a powerful one. That is why I am interested in medicine. I think I’d like to be a cardiologist. After I graduate, I’m thinking of working in North Carolina so I can help the growing immigrant population and those who don’t speak English. Shirley Ort of UNC’s Office of Scholar­ships and Student Aid told me that I had been chosen for the Carolina Covenant. When she showed me my financial aid package, I almost cried to learn that everything had been planned for me, and that I could graduate with no debt. I had no idea that UNC had so many opportunities for students like me. The Carolina Covenant is a great opportunity for students who don’t have access to a lot of financial resources. Students have more of a feeling of security because they can pay for college while they’re in college, and not wait until they graduate to pay off their debt.”
Nayeli Lozada, Class of 2008
Carolina Covenant Student2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 13
income levels were at about $28,000 and $18,000, respectively.
Carolina was the first major public U.S. university to announce plans for such a program in fall 2004. Since then, several universi­ties, including Virginia, Maryland, Nebraska, Illinois, Harvard, and Brown have created or announced plans for similar programs.
The University consistently ranks among the national leaders in making education financially accessible to students. Carolina also meets the full need of middle-income students, with financial aid packages comprised of two-thirds grants and scholarships and one-third loans and work-study. (Most aid packages are closer to two-thirds loans and one-third grants.)
Average debt among graduating seniors who borrowed was $11,751 in 2004. In 2003, that number was $11,519, down from $13,700 in 2000. Less than a quarter of the University’s graduat­ing students accumulated debt. By contrast, the nation’s average student debt loan doubled to $18,900 in about a decade.
In 2005, the Board of Trustees approved devoting all proceeds from the sale of trademark-licensed University products (such as T-shirts and caps bearing the Tar Heel logo) to scholarships and financial aid. Previously, 75 percent of these funds had already been dedicated to need-based aid, providing much of the founda­tion for the Carolina Covenant. The rest of these funds are being dedicated to new merit-based scholarships. That action created 59 merit-based scholarships, and 53 of those were awarded to North Carolinians. Carolina saw an immediate increase—slightly more than 4 percent—in the yield rate of admitted North Carolina students deciding to attend Carolina.
Carolina First: Aiming Higher With New Goal
The Carolina First Campaign is a comprehensive, multi-year private fund-raising campaign—the largest in the University’s history—to support the vision of Carolina becoming the nation’s leading public university.
In October 2005, the campaign steering committee increased the goal from $1.8 billion to $2 billion. Now Carolina is one of just eight American universities seeking campaign goals of at least $2 billion. The others are UCLA, the universities of Chicago, Michi­gan, Virginia, and Washington, as well as Johns Hopkins and New York universities. Institutions completing campaigns of $2 billion or more since 1999 are Columbia, Duke, and Harvard universi­ties, the Massachusetts Institute of Technology, and the Univer­sity of Southern California.
By October 2005, Carolina First had brought in $1.56 billion, 78 percent of the new goal, while being about three-quarters complete. The campaign created 151 endowed professorships for faculty toward a goal of 200, and 523 scholarships and fellowships for students out of the goal of 1,000. Those funds are part of the gifts and pledges that include $628 million to be added to Car­olina’s endowment. Generous donors have funded new faculty research, new academic programs and initiatives as well as new buildings and renovations. In setting the Carolina First Campaign goal $200 million higher to $2 billion, the University is focusing on faculty support, merit-based scholarships, and capital projects. These are the three most pressing priorities that affect Carolina’s ability to compete with peer campuses.
Total giving in fiscal 2005 was $192.5 million in gifts and private grants, breaking Carolina’s single-year record of $192.4 million, set in 2004. This total counts only cash and assets received out­right. Including pledges and deferred gifts, commitments totaled $244.8 million, topping 2004’s $236 million.
Major gifts and pledges announced in fiscal 2005 included:
$3 million from Charlie Loudermilk, chairman and chief executive officer of Aaron Rents, Inc., to expand executive education facilities at the Rizzo Conference Center, part of the Kenan-Flagler Business School.
$600,000 from alumnus and former U.S. Ambassador An­thony S. Harrington and his wife, Hope. That completed a $1.6 million endowment fund to support the Institute of Latin American Studies in the College of Arts and Sciences.
$2.37 million from the Gary W. Parr Family Foundation in New York City to establish the Parr Center for Ethics in the department of philosophy. Gary W. Parr, a 1979 alumnus, is deputy chairman of Lazard Freres & Co LLC, in New York. The Parr Center is the public face of the University’s com­mitment to ethics.
A $7.1 million pledge from the Ithaca, N.Y.-based Triad Foundation will fund the Roy H. Park Fellowship program n
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DISORDER SPECIALTIST The Carolina First Campaign brought Cyn­thia Bulik to Carolina as the William R. and Jeanne H. Jordan Distin­guished Professor of Eating Disorders. She holds the nation’s only endowed chair devoted to the study and treatment of eating disorders, and just one of two in the world. She also directs the Southeast’s first comprehensive eating disorders program at UNC Hospitals.
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in the School of Journalism and Mass Communication from 2005-06 through 2009-10.
The Charlotte-based Bank of America Foundation gave $900,000 to the Carolina Covenant, as well as $100,000 to the Center for Banking and Finance in UNC's School of Law. Pepsi Bottling Ventures LLC was another major con­tributor to the Carolina Covenant, providing $1.5 million.
The James M. Johnston Trust of Chevy Chase, Md., gave $2.1 million to student aid programs. n
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For the eighth time in 12 years, the development office won the Council for Advancement and Support of Education/Wealth ID Award for superior fund raising. No other university—public or private—has won the award as many times.
Carolina First is the private complement to the generous public support that North Carolina’s voters and legislators have shown for the University. In 2000 North Carolina voters approved $510 mil­lion in bond funding for repair, renovations, utilities, infrastructure, and new buildings at Carolina. Carolina First is helping leverage that bond money by making good on Chancellor Moeser’s pledge to state citizens to triple it through private gifts. In all, the University plans to invest another $1 billion in non-state funds for additional buildings essential to continued excellence.
Campus Master Plan: Steering Rapid Growth
The campus master plan is guid­ing the next several decades of an aggressive renovation and build­ing program at Carolina. The plan shows where and how to place future buildings. It identifies trans­portation and utility corridors and suggests ways to protect open space and meet key environmen­tal standards covering topics such as storm water runoff. The plan also recognizes the importance of enhancing the intellectual climate and the valuable University cul­ture of collegiality and collabora­tion.
Fiscal 2004-2005 marked the fourth year of master plan imple­mentation. The Board of Trustees approved the plan in 2001 after three years of work involving the University, consultants, and Town of Chapel Hill represen­tatives. Later joint town-gown discussions led to a new zoning ordinance and the rezoning of the main campus. A development plan approved by the town in 2001 included details on proposed development and strategies to mitigate community impacts. The University reached agreements with the town about two separate modifications to the campus de­velopment plan in 2003-2004.
BUILDING IN SUSTAINABILITY Below: The common area in front of the new Rams Head Center combines key elements of the campus master plan including promoting a pedestrian-oriented campus. Underneath the quad lies state-of-the-art storm water management technology—another key aspect of the master plan’s sustainability component. The center provides recreation, dining, and parking facilities as well as a grocery store. To the left: Sports Cafe in the Rams Head Center. Above: The Rams Head Center exterior. 2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 15
By mid-2005, the University had advanced the bond referen­dum project schedule to achieve completion six months ahead of the baseline target. Overall, the current construction program, exceeding $1.5 billion, represents the equivalent of building Wake Forest University in the middle of the active Chapel Hill campus.
Related accomplishments included:
36 projects completed (21 percent of the total program) within budget and on schedule. Total value: $310 million.
42 projects under way (50 percent of the program) all within budget, and 40 ahead of or on schedule. Total value: $750 million.
64 projects in design (29 percent of the program). Total value: $440 million.
Cash flow met projections.
The University also began a process to update the campus master plan as the main campus approaches complete build out and finished a report of the Chancellor’s Task Force on Landscape Heritage and Plant Diversity.
Other highlights included the following:
The Historically Underutilized Business (HUB) Resource Center’s participation rate is 14.6 percent overall, leading the UNC System. The University awarded $120.24 million worth of HUB contracts.
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Continued emphasis on transportation strategies such as park-and-ride lots, fare-free transit, Zip Cars, and a nation­ally recognized commuter alternative program, for which participation continued to increase—by 25 percent in 2004-05 alone.
Advanced key master plan projects, including Rams Head Center, a linchpin in the plan that combines a 700-space parking deck, dining and student recreation facilities, and innovative sustainability practices. Other recently completed projects include the Health Sciences Library, which will foster collaboration among scientists and educators, and Car­rington Hall, which doubled the School of Nursing’s space and became the UNC System’s first building to be certified for Leadership in Energy and Environmental Design by the U.S. Green Building Council.
Ribbon-cuttings held in fall 2005 included the newly renovated Memorial Hall, the Michael Hooker Research Center in the School of Public Health, and the 440 West Franklin Street Building renovation. Ground also was broken for the North Carolina Cancer Hospital, a $180 million facility being built by the UNC Health Care System.
n Other projects under way include: first phases of the Carolina Physical Science Complex; Global Educa­tion Center; renovation of Bur­nett-Womack and Medical Sciences Research Building addition and renovation (School of Medicine); Genetic Medicine Building (schools of medicine and pharmacy); student family housing; Campus Y; Infor­n
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ARTS HOME Memorial Hall, resplendent after a three-year, $18 million transformation, reopened in September 2005 with the launch of an exciting new Carolina Performing Arts Series featuring over 700 artists. Violinist Itzhak Perlman, left, was among the performers during the reopening ceremonies.
LOOMING CRANE A tower crane looms over the construction site for the Global Education Center off Mc­Cauley Street. The center—the result of the Higher Education Bond Refer­endum and private gifts—is a visible and tangible symbol of the Univer­sity’s commitment to being engaged internationally.16 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
mation Technology Services Building; and infrastructure improvements (chilled water, utilities, and steam plant).
Academic Plan: Guiding the Future
The University’s strategic focus and priorities build upon the academic plan completed and endorsed by the Board of Trustees in 2003. The plan, developed through a campus task force, guides the University’s decisions about investments in the academic enterprise in the short term. It is tied with parallel efforts to develop a rolling five-year financial plan, which tracks priority initiatives and projects expected costs and funding sources. These initiatives range from faculty compensation to library needs to information technology infrastructure improvements.
The academic plan’s six key priorities are:
Provide the strongest possible academic experiences for un­dergraduate, graduate, and professional students.
Further integrate interdisciplinary research, education, and public service.
Improve faculty recruitment, retention, and development.
Increase diversity among faculty, students, and staff.
Enhance public engagement.
Extend Carolina’s global presence, research, and teaching.
The plan is dynamic and will be reviewed and revised as new op­portunities and challenges emerge. The Provost’s Office complet­n
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ed an update summarizing action steps taken to follow through on plan recommendations in July 2005.
Faculty Research: Growing Excellence
Carolina faculty conduct research that creates new knowledge and useful technologies as well as pumps hundreds of millions of dollars into the North Carolina economy. These advances, combined with teaching and public service, make the University an educational and economic beacon for the state.
Research funding has risen steadily at Carolina for more than two decades, making Chapel Hill one of the top U.S. public universi­ties in research support and creating jobs through new products and spin-off companies. The faculty attracted $579 million in total contract and grant funding in fiscal 2005—up slightly. The National Institutes of Health (NIH) is Carolina’s central funding source, and the faculty ranked 15th overall in 2004 with nearly $290 million in total NIH funding.
Positive growth in the University’s overall research funding cor­responds with a decision made in mid-1998 by the North Carolina, General Assembly to permit the University to retain all overhead receipts generated by research.
Ongoing research initiatives include efforts to tackle challenges such as genome sciences, which is unraveling the mysteries of DNA and the human genome. Carolina has committed at least $245 million over a decade to be at the forefront of the genomics revolution. Led by renowned genetics scientist Terry Magnuson, the initiative repre­sents a public-private investment that includes a $25 million anony­mous gift creating the Michael Hooker Center for Proteomics to study a specialized area of genetics. One result of the initiative is the School of Public Health’s selection by the U.S. Centers for Disease Control and Prevention to house one of three U.S. centers for excellence for genom­ics and public health.
Since 2000, the University has main­tained a strategy of targeted investment in “big idea” research themes, knitting together existing strengths in various areas to create broad, interdisciplinary new thrusts.
FACULTY EXCELLENCE Above: Dr. Barry M. Popkin, professor of nutrition, directs a new obesity center funded by the National Institutes of Health. The center represents part of Carolina’s success in competing for research grants as part of the NIH’s “Roadmap for Medical Research.” Left: Assistant Professor Daniel Reichart, and his team of undergraduate and graduate students measured the distance of an explosion scientists de­termined to be the farthest ever detected: a gamma-ray burst from the edge of the visible universe. Junior Josh Haislip, far right, was the first to analyze the data from a telescope UNC helped build in Chile. Others, from left to right, were seniors Chelsea MacLeod and Justin Kirschbrown along with graduate student Melissa Nysewander.2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 17
Recent examples of key new interdisciplinary initiatives include:
The Renaissance Computing Institute (RENCI), created by Chancellor’s Eminent Professor of Computer Science Dan Reed, addresses problems spanning the sciences and engi­neering, the arts, the humanities, and commerce. RENCI, with broad collaboration with Duke, N.C. State, and the private sector, envisions multidisciplinary collaborations through the application of leading-edge technologies.
In the past year RENCI launched projects in ocean model­ing, biology, medicine, and other disciplines with state and national collaborations. RENCI participated in a Duke-N.C. State-UNC proposal for a National Center for Evolutionary Biology that was funded by the National Science Founda­tion. In addition, RENCI proposed the Carolina Center for Exploratory Genetic Analysis that was funded by the National Institutes of Health. With support from the Of­fice of the President, UNC created a bioinformatics portal to advance scientific discovery and biomedical education. RENCI partnered with the Health Sciences Library to cre­ate a high-performance visualization wall and collaboration facility in the newly renovated library—a first in the nation. n
The “Roadmap for Medical Research” initiative, intended to focus future NIH funding in 21 broad areas of concentra­tion. The University established a Roadmap Office led by a faculty member to position the campus for the highest level of success. This NIH initiative encourages researchers to at­tack difficult problems using interdisciplinary collaboration and sophisticated computational techniques to create quick translations to patient care.
As a result of the work of the Roadmap Office and the strength of Carolina’s faculty and their interdisciplinary work, Chapel Hill was the only university to receive eight of 21 grants in the fall 2005 Roadmap competition. This funding so far totals $15.5 million and includes starting the Carolina Center of Nanotechnology Excellence, which will marry expertise in nanotechnology with patient research at the Lineberger Comprehensive Cancer Center. Last year, Carolina also received three of the 21 initial Roadmap grants—more than any other university.
The Carolina Entrepreneurial Initiative, funded with a five-year, $3.5 million grant from the Ewing Marion Kauffman Foundation is being matched two-to-one by the University. UNC is one of seven Kauffman Foundation-designated “Entrepreneurial Universities,” chosen through a national competition. Carolina is deploying new programs to create a surge of entrepreneurship among students, faculty, and staff, including a new minor in entrepreneurship in the College of Arts and Sciences. The program is led by a team from an array of disciplines and managed by the Frank Hawkins Ke­nan Institute of Private Enterprise. Successful entrepreneurs, many of them alumni, are advisors, lending their real-world expertise.
The Office of Economic and Business Development (OEBD) matches faculty and campus expertise and resources with economic development issues facing North Carolina and its communities and organizations. This office is led by Jesse White, Jr., who headed the Appalachian Regional Commission and the Southern Growth Policies Board.
During its first year of operations, OEBD worked within the University to develop a network of faculty interested in economic development work in North Carolina. It also worked on several economic development projects in the state, including Carolina’s response to the state’s success­ful bid to have Credit Suisse First Boston locate a major facility in the Research Triangle Park area. At the announce­ment ceremony, the company stated that the assets of North Carolina’s universities were a deciding factor in locating in North Carolina.
Technology: Promoting Economic Development
Among the University’s goals in the research arena are to transfer new technologies into the consumer marketplace, resulting in increased economic value for North Carolinians as well as income for inventors and the University.
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START-UP Xintek is one of Carolina’s newest start-up companies spawned from faculty research and innovation. It is based on an invention by Otto Zhou, Lyle Jones professor of physics and materials sciences in the College of Arts and Sciences. He is developing a new method of medical X-ray imaging based on pulsed nanofibers. The system can capture images of the body or a specific organ while they are moving. The result is more precise and sensitive X-rays.18 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
Key accomplishments included the following:
Faculty filed 113 invention disclosures with the campus
Office of Technology Development.
119 patent applications were filed, and 25 new U.S. patents were issued to the University. That brought the total of U.S. and foreign patents held by Carolina to 655.
31 inventions were licensed.
Licensing income totaled $1.98 million.
Among the recent, promising inventions from Carolina research is an experimental anti-HIV drug being developed by Panacos Pharmaceuticals. Phase II clinical trials have been successfully completed. The drug was developed by Carolina researcher Kuo-Hsiung Lee, Kenan professor of natural products in the School of Pharmacy. Its central compound was discovered in an herb grown in Taiwan but is also found in the bark of birch trees across North America.
Faculty discoveries and innovations have resulted in the creation of 25 UNC spin-off companies and about 281 jobs. For example, Otto Zhou, Lyle Jones professor of physics and materials sciences in the College of Arts and Sciences, is developing a new method n
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of medical X-ray imaging based on pulsed nanofibers. The system can capture images of the body or a specific organ while they are moving. The result is more precise and sensitive X-rays. Zhou’s invention led to a start-up company, Xintek.
Other examples of commercialization leading to spin-offs include therapeutic agents for Parkinson’s Disease, technologies for drug delivery to treat cancer, industrial applications for carbon nanotubes, and gene therapy treatment for diseases like muscular dystrophy.
Carolina North: Tapping the Full Potential
The University’s future contributions to the North Carolina economy one day will include Carolina North, to be built on 900 acres of UNC-owned land less than two miles from main campus.
Carolina North will redefine the University’s engagement with the state, nation, and world. University leaders intend to create a vibrant, innovative setting for outreach and service, research collaborations with private industry and public agencies, and economic development for North Carolina.
The University advanced its conceptual plan for Carolina North in the past year. A new economic impact study projects that completion of the first two phases of Carolina North by 2020 will create over 7,500 permanent high-wage jobs for North Car­olinians. That means $433 million in annual salary and personal
CAROLINA NORTH This artist’s rendering shows a quadrangle view of Carolina North, planned on University-owned land less than two miles from main campus. An economic impact study projects that completion of the first two phases of Carolina North will create over 7,500 permanent jobs. That means $433 million in annual salary and personal income and $600 million in annual business revenue.2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 19
income and $600 million in annual business revenue. Construc­tion will create 9,000 jobs, $353 million in personal income, and $979 million in business revenue. Carolina North should generate $48 million in recurring tax revenue.
The study confirmed that Carolina North has the potential to position the University as a leading national center for public-private partnerships and to be a catalyst for the state’s economic transformation.
A separate three-year Horace Williams Airport site study by an aviation engineering and consulting firm examined possible alternate airport sites to accommodate Medical Air Operations (MedAir). That work included an analysis of the costs of mov­ing MedAir to Raleigh-Durham International Airport to enable development of Carolina North.
In addition, during its meeting on May 26, 2005, the Board of Trustees unanimously endorsed the University’s vision for Caro­lina North.
Academic Reputation: Highlighting
Rankings and Leadership
Several national publications and reports ranked Carolina promi­nently during fiscal 2005 in categories ranging from academic quality to affordability to diversity to entrepreneurship to interna­tional presence.
Highlights included the following:
5th best public university in U.S. News & World Report’s 2006 “Best Colleges” guidebook. Affirmation as a national leader in student accessibility; 1st among public campuses and 10th overall in “Great Schools, Great Prices,” based on academic quality, net cost of attendance and average stu­dent debt. 5th among publics for “least debt.” 54% of course sections enrolled fewer than 20 students — a key UNC measure of excellence.
Kenan-Flagler Business School: tied for 5th among under­graduate programs; tied for second among public campuses.
4th among public universities in “The Top American Research Universities,” produced in December 2004 by the Lombardi Program on Measuring University Performance at the Uni­versity of Florida. Based on categories such as research, en­dowment assets, private giving, faculty, and advanced training.
1st among the 100 best public colleges combining great aca­demics and affordable tuitions as ranked by Kiplinger’s Personal Finance. Carolina has been first four consecutive times.
A “best value” among 81 schools chosen for “America’s Best Value Colleges, 2006 Edition” by The Princeton Review/Random House for outstanding academics, relatively low costs, and generous financial aid packages. Carolina has appeared in this publication two years in a row.
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1st for the top entrepreneurial campus and 5th “most con­nected.” according to The Princeton Review and Forbes.com. UNC has an undergraduate business degree offering with a concentration in entrepreneurship in the Kenan-Flagler Business School, a new minor in entrepreneurship in the College of Arts and Sciences, and a new Carolina Entre­preneurial Initiative. In 2000, UNC became the nation’s largest university requiring undergraduates to own laptop computers. With more than 850 wireless access points, UNC provides wireless connectivity in classrooms, labs, libraries, residence halls, and quadrangles.
1st among public research universities, for the second con­secutive year, recording the highest rate of undergraduates studying abroad in 2002-2003; 7th among all research univer­sities for the total number of undergraduates going abroad, according to an annual report published by the Institute of International Education.
1st among U.S. academic institutions recognized as “best places to work for postdocs,” according to The Scientist mag­azine. Based on conditions for postdoctoral fellows working n
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PICTURESQUE SUNSET The sun sets over the campus, creating a dark outline of the Bell Tower.
20 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
in the life sciences as part of the magazine’s third annual survey. Carolina was 6th among all U.S. institutions, including government institutions and private research centers.
“Hottest” for health careers, according to the Kaplan/News­week 2005 “How to Get into College” guide, based on admis­sions trends and interviews with a broad array of educators, admissions officers, students and other longtime observers of the admissions process. An article in the guide says UNC’s diverse offerings in the health disciplines — all in the same place — are helping attract prospective students.
14th — the highest ranking for any major public research university — in the 2004 “Black Enterprise-DayStar Top 50 Colleges and Universities for African Americans” list. This ranking was based on responses to questions about which schools were both a good academic and social fit for African-Americans.
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One of the nation’s top universities in fostering social responsibility and public service, according to The Princeton Review and Campus Compact. Carolina appears in a book, “Colleges With a Conscience: 81 Great Schools With Outstand­ing Community Involvement.” Based on admissions practices, scholarships rewarding community service, and support for service-learning programs.
Among the 20 very “best buy” public universities in the U.S. and Canada as judged by the 2005 Fiske Guide to Colleges based on the quality of the academic programs in relation to the cost of attendance.
n Degree programs or specialty areas from the schools of business, education, law, medicine, pharmacy, public health as well as the College of Arts and Sciences appeared prominently in the Spring 2005 edition of U.S. News & World Report’s “American’s Best Graduate Schools” issue. Highlights included medicine, overall primary care, 2nd, over­all research, tied for 23rd; pharmacy, 3rd for Pharm.D. doctoral program; Kenan-Flagler Business School’s MBA program, tied for 21st, law, tied for 27th; education, tied for 27th; sociology, tied for 4th; history, tied for 13th; political science, tied for 13th; English, tied for 19th; and psychology, tied for 22nd.
n Kenan-Flagler Business School appeared in several other recent best MBA program lists. They included Business Week, 16th; Forbes, 14th; The Wall Street Journal, 9th based on a survey of corporate recruiters; The Finan­cial Times, 7th; and Hispanic Business, 5th, among top business schools for Hispanics. The school’s international executive educa­tion program was ranked 17th overall by The Financial Times. The school was included in a new Princeton Review book,“Best 143 Business Schools,” and the MBA program was ranked 6th for best campus environment, 10th for best professors and 10th for most family friendly.
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MBA PROGRAM Business Week magazine ranked UNC Kenan-Flagler’s Executive MBA Program fifth. UNC gradu­ates were surveyed and gave high marks for teaching quality by a top-notch faculty, the team-based environment, and a re­sponsive staff.
SCHOLAR Right: Rachel Mazyck of Laurel, Md., a 2002 Caro­lina graduate, won a 2005 Rhodes Scholarship to Oxford University in England. She became the 38th winner from Carolina since 1902. UNC ranks second among U.S. public universities in numbers of Rhodes Scholars produced. 2005 was one of the university’s most suc­cessful years ever for undergraduates awarded prestigious national and international scholarships.2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 21
BOARD OF TRUSTEES
Richard T. Williams
Chair, Charlotte, NC
Nelson Schwab III
Vice Chair, Charlotte, NC
Jean Almand Kitchin
Secretary, Scotland Neck, NC
Timothy B. Burnett
Greensboro, NC
Philip G. Carson
Asheville, NC
Russell M. Carter
Wilmington, NC
John G. B. Ellison, Jr.
Greensboro, NC
Paul Fulton, Jr.
Winston-Salem, NC
Karol V. Mason
Atlanta, GA
Roger L. Perry, Sr.
Chapel Hill, NC
A. Donald Stallings
Rocky Mount, NC
Robert W. Winston III
Raleigh, NC
Seth M. Dearmin
Ex-Officio, Chapel Hill, NC
James C. Moeser
Chancellor
Richard A. Baddour
Director of Athletics
Robert J. Cannon
Equal Opportunity/ADA Officer
Nancy K. Davis
Associate Vice Chancellor for University Relations
Douglas S. Dibbert
President, General Alumni Association
Archie W. Ervin
Associate Provost for Diversity and
Multicultural Affairs
Kevin M. FitzGerald
Special Assistant to the Chancellor
for State Government Relations
Bernadette Gray-Little
Dean, College of Arts and Sciences
Margaret A. Jablonski
Vice Chancellor for Student Affairs
Brenda W. Kirby
Secretary of the University
Matthew G. Kupec
Vice Chancellor for University Advancement
Jerome A. Lucido
Vice Provost for Enrollment Policy and Management
Daniel A. Reed
Vice Chancellor for Information Technology
and Chief Information Officer
William L. Roper
Vice Chancellor for Medical Affairs and
Dean, School of Medicine
Robert N. Shelton
Executive Vice Chancellor and Provost
Leslie Chambers Strohm
General Counsel
Nancy D. Suttenfield
Vice Chancellor for Finance and Administration
Tony G. Waldrop
Vice Chancellor for Research and Economic Development
CHANCELLOR’S CABINET 22 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
The University of North Carolina at Chapel Hill
Organi zationation Chart hart hart hart hart hart hart hart hart hart
Board of Trustees Chair
Richard T. Williams
Chancellor
James C. Moeser
Executive Vice
Chancellor and Provost
Robert N. Shelton
Vice Chancellor for
Student Affairs
Margaret A. Jablonski
Vice Chancellor for Research and
Economic Development Tony G. Waldrop
Vice Chancellor for Medical Affairs
William L. Roper
Vice Chancellor for Finance and Administration
Nancy D. Suttenfield
General Counsel
Leslie Chambers Strohm
Vice Chancellor for Information Technology
Daniel A. Reed
Vice Chancellor for University Advancement
Matthew G. Kupec
Director of Athletics
Richard A. Baddour
Equal Opportunity/
ADA Officer
Robert J. Cannon
Internal Auditor
Phyllis C. PetreeFINANCIAL SECTION
Students enjoy a lecture on the quad at the south end of McCorkle Place.24 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 25
26 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
Introduction
Management’s discussion and analysis provides an overview of the financial position and activities of The University of North Caro­lina at Chapel Hill (the “University”) for the fiscal year ended June 30, 2005, with comparative information for the fiscal year ended June 30, 2004. Management has prepared the discussion and analysis to be read in conjunction with the financial statements and
accompanying note disclosures.
The University is a constituent institution of the 16-campus University of North Carolina System (UNC System), a component unit of the State of North Carolina and an integral part of the state’s Comprehensive Annual Financial Report. The financial reporting
entity for the financial statements is comprised of the University and 10 component units. Although legally separate, The University of North Carolina at Chapel Hill Foundation Investment Fund, Inc., UNC Investment Fund, LLC, UNC Management Company, Inc., The University of North Carolina at Chapel Hill Foundation, Inc., The Kenan-Flagler Business School Foundation, The School of
Social Work Foundation, Inc., and U.N.C. Law Foundation, Inc. are reported as if they were part of the University. The Medical Foun­dation of North Carolina, Inc., The Educational Foundation Scholarship Endowment Trust, and the University of North Carolina at Chapel Hill Arts and Sciences Foundation, Inc. are legally separate, non-profit, tax-exempt organizations that are reported as discretely presented component units based on the nature and significance of their relationship to the University.
Management’s discussion and analysis includes a separate section regarding the three component units that are discretely reported in the financial statements. The remainder of the management’s discussion and analysis pertains to the University and the seven compo­nent units reported as part of the University.
Financial Highlights
The University’s financial position at June 30, 2005 remained strong with total assets of $3.8 billion. Net assets, which represent the residual interest in the University’s assets after deducting liabilities, were $2.6 billion at June 30, 2005. The University’s net assets in­creased by $367 million in fiscal year 2004-2005, when operating, non-operating, and other changes are included. A comparison of the total assets, liabilities, and net assets at June 30, 2005 and 2004 and a comparison of the major components of the changes in net assets for the two fiscal years is presented below:
Net assets increased 16.4 percent at June 30, 2005 over the prior year. Total assets increased 10.8 percent and total liabilities increased less than one percent for the same period. Operating revenues increased at the same rate as operating expenses in 2004-2005 over the prior year, 4.9 percent. Net non-operating revenues and expenses increased 12 percent in 2004-2005 over the prior year. The state appropriations growth of 6.9 percent was significant, given the previous, lesser rates of increase. Investment income growth remained strong with a 14.4 percent increase in 2004-2005
management
’s discussion and analysis analysis analysis analysis analysis
4,000,000,000
3,000,000,000
2,000,000,000
1,000,000,000
0
2005 2004
Total Assets Total Liabilities Net Assets
Statement of Net Assets
3,760,963,429
2,607,879,263
1,153,084,16666
3,393,709,194
2,241,199,157
1,152,510,037
Statement of Revenues, Expenses
and Changes in Net Assets
2,500,000,000
2,000,000,0001,500,000,0001,000,000,000500,000,0000#1#2,500,000,000
2,000,000,000
1,500,000,000
1,000,000,000
500,000,000
0
2005 2004
1,157,001,367
68
4,361,024
366 ,68 0,106
1,68681,900,696
207,218,411
2,500,000,0002,000,000,0001,500,000,0001,000,000,000500,000,0000#1#Capital Gifts & Grants and Endowments
Non-operating Revenues, net
Operating Revenues
Increase in Net Assets
Operating Expenses
1,102,637,321
6
11,015,308
216,013,557
1,603,385,712
105,746,6402005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 27
over the prior year. Research funding, fund raising for operational and capital needs, and construction funding through the North Carolina Higher Education Bond Referendum of 2000 continued to be posi­tive factors in the improved financial well-being of the University.
Using the Financial Statements
The financial statements have been prepared in accordance with Gov­ernmental Accounting Standards Board (GASB) principles. Begin­ning with the fiscal year ended June 30, 2002, the financial statements have been based on the provisions of GASB Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments, as amended by GASB Statement No. 35, Basic Financial Statements – and Management’s Discussion and Analysis – for Public Colleges and Universities. The full scope of the University’s activi­ties is considered to be a single business-type activity and accordingly, is reported within a single column in the basic financial statements.
Effective for the fiscal year ended June 30, 2005, the University imple­mented GASB Statement No. 40, Deposit and Investment Risk Disclo­sures – an amendment of GASB Statement No. 3. The statement provides disclosures that inform readers about deposit and investment risks that could impact the entity’s ability to provide services and meet its financial obligation. Among the issues addressed are common deposit and investment risks related to credit risk, concentration of credit risk, interest rate risk, custodial credit risk, and foreign currency risk.
The University’s Comprehensive Annual Financial Report includes the following three financial statements.
Statement of Net Assets
Statement of Revenues, Expenses, and Changes in Net Assets
Statement of Cash Flows
Management’s discussion and analysis provides information regarding each of these financial statements.
Other important characteristics of the financial statements in­clude the following:
Net assets represent the excess of total assets over total liabilities. There are three classes of net assets – unrestricted, restricted (non-expendable and expendable), and invested in capital assets net of related debt.
Assets and liabilities are categorized as either current or non- current. Current liabilities are due within one year, and current assets are those assets available to pay current liabilities.
Revenues and expenses are categorized as either operating or non-operating, and a net income or loss from operations is displayed. State appropriations, noncapital gifts and grants, and investment income are non-operating revenues, which results in a net loss from operations.
Tuition and fees revenues are reported net of scholarships and n
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fellowships that are applied to student accounts. The “scholarship discounts” reduce the tuition and fees revenues and the scholar­ship and fellowship expenses by equal amounts. Scholarships and fellowships paid directly to students continue to be reported as expenses.
Expenses are reported in the financial statements by natural clas­sification such as salaries and benefits, supplies and materials, and other categories. Presentation by program classification such as instruction, research, and public service are disclosed in the notes to the financial statements.
Purchases of capital assets are expensed over the asset’s useful life by the recognition of depreciation expense on the capital assets.
A Statement of Cash Flows using the direct method is reported.
Condensed Statement of Net Assets
The Statement of Net Assets presents the financial position of the University at the end of the fiscal year, includes all assets and liabilities of the University, and segregates the assets and liabilities into current and non-current components. Net assets represent the difference between total assets and total liabilities and are one indicator of the University’s current financial condition. The following table summa­rizes the University’s assets, liabilities, and net assets at June 30, 2005 and 2004.
Assets, Liabilities, and Net Assets
2005 2004 %
a
s Restated Change
Assets:
Current assets $856,015,143 $810,667,402 5.6
Non-current assets: Endowment investments 972,461,495 848,469,859 14.6
Other long-term investments 283,640,904 299,874,517 (5.4)
Capital assets, net 1,550,201,138 1,276,669,341 21.4
Other non-current assets 98,644,749 158,028,075 (37.6)
Total Assets 3,760,963,429 3,393,709,194 10.8
Liabilities: Current liabilities 420,350,366 401,819,861 4.6
Non-current liabilities: Funds held in trust for
p
ool participants 260,960,010 235,608,859 10.8
Long-term liabilities 440,422,863 482,557,455 (8.7)
Other non-current liabilities 31,350,927 32,523,862 (3.6)
Total Liabilities 1,153,084,166 1,152,510,037 0.0
Net Assets: Invested in capital assets,
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et of related debt 1,017,382,707 855,739,608 18.9
Restricted: Non-expendable 378,234,148 328,735,341 15.1
Expendable 736,631,596 648,019,434 13.7
Unrestricted 475,630,812 408,704,774 16.4
Total Net Assets $2,607,879,263 $2,241,199,157 16.4
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28 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
CURRENT ASSETS AND LIABILITIES
The Statement of Net Assets shows the University had total assets of $3.8 billion at June 30, 2005, an increase of 10.8 percent over the prior year. Working capital, which is current assets less current liabilities, was $435.7 million at June 30, 2005, an increase of 6.6 percent over the previous year. One significant factor causing the working capital improvement was the increase in short-term invest­ments resulting from increased expendable resources and investment returns.
Current assets are represented graphically below:
Cash and cash equivalents include cash in bank accounts, cash with fiscal agents, and cash invested through the State Treasurer of North Carolina.
Short-term investments include funds invested through an investment pool administered by the University.
Receivables include amounts due from students of the University, patients of the professional health-care clinics, governmental and private entities for contract and grant awards, donors for pledges of gifts, as well as accrued investment earnings.
Inventories represent goods for resale by auxiliary operations of the University.
Other current assets include student loans and amounts due from the State of North Carolina or its component units.
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2004-2005
Total Current Assets: $856,015,143
2003-2004
Total Current Assets: $810,66667,402
Cashashash and and and and Shorthorthorthort-termtermtermterm Receivables eceivables eceivables eceivables eceivables eceivables eceivables eceivables eceivables eceivables eceivables Inventories nventories nventories nventories nventories nventories nventories nventories nventories nventories nventories Otherthertherther Currenturrenturrenturrenturrenturrent
Equivalents quivalents quivalents quivalents quivalents quivalents quivalents quivalents quivalents quivalents quivalents Investments nvestments nvestments nvestments nvestments nvestments nvestments nvestments nvestments nvestments nvestments nvestments nvestments Assetsssetsssetsssetsssets
$480,000,000
$420,000,000
$360,000,000
$300,000,000
$240,000,000
$180,000,000
$120,000,000
$60,000,000
$0
$455,492,447 $473,862,880
-3.9%
$262,743,899 $200,866,660
30.8%
$17,400,526 $15,588,257
11.6%
$6,453,831 $6,953,170
-7.2%
Current Assets - Comparative
$113,924,440 $113,396,435
0.5%2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 29
Current liabilities are represented graphically below:
Accounts payable and accrued liabilities include payables to vendors, accrued payroll costs, and retainage on construction contracts.
Deferred revenue is primarily gifts through the planned giving program and represents the calculated remainder after annuity obliga­tions to beneficiaries are determined based on the terms of the gift annuity, charitable trust, or other planned giving arrangement.
Obligations under reverse repurchase agreements are liabilities incurred as part of the University’s investment management program.
The current portion of long-term liabilities includes bonds payable, notes payable, capital leases payable, annuity payable, and com­pensated absences (accrued vacation leave).
Other current liabilities include amounts due to the State of North Carolina or its component units, deposits and interest payable, funds held for others, and short term debt.
n
n
n
n
n
Accountccountccountccountccountccount Payable ayable ayable ayable ayable ayable ayable Deferredeferredeferredeferredeferredeferredeferred Obligationsbligationsbligationsbligationsbligationsbligationsbligationsbligationsbligationsbligations Under nder nder nder nder Currenturrenturrenturrenturrenturrent-portion portion portion portion portion portion portion portion Otherthertherther Currenturrenturrenturrenturrenturrent
& Accruedccruedccruedccruedccruedccrued Revenue evenue evenue evenue evenue evenue evenue Reverseeverseeverseeverseeverseeverse Repurchase epurchase epurchase epurchase epurchase epurchase epurchase epurchase epurchase epurchase Longongong-term term term term term Liabilitiesiabilitiesiabilitiesiabilitiesiabilitiesiabilitiesiabilitiesiabilitiesiabilitiesiabilities
Liabilities iabilities iabilities iabilities iabilities iabilities iabilities iabilities iabilities iabilities iabilities iabilities Agreements greements greements greements greements greements greements greements greements greements Liabilitiesiabilitiesiabilitiesiabilitiesiabilitiesiabilitiesiabilitiesiabilitiesiabilitiesiabilities
$160,000,000
$140,000,000
$120,000,000
$100,000,000
$80,000,000
$60,000,000
$40,000,000
$20,000,000
$0
$90,617,279 $77,819,675
16.4%
$33,351,813 $42,842,783
-22.2%
$0 $127,858,750
-100%
$145,474,087 $122,128,145
19.1%
$150,907,187 $31,170,508
384.1%
Current Liabilities - Comparative
2004-2005
Total Current Assets: $420,350,36666
2003-2004
Total Current Assets: $401,819,8686130 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
Endo wment and Other Long -term Investments
Endowment investments increased 14.6 percent during 2004-2005 and were $972.5 million at June 30, 2005 and $848.5 million at June 30, 2004, and include permanent endowments, funds in­ternally designated as endowments and similar funds such as gift annuities and charitable trusts. Net assets of endowment and similar funds were $930.6 million at June 30, 2005 and $801.3 million for the prior year.
The endowment assets are invested with The University of North Carolina at Chapel Hill Foundation Investment Fund, Inc. (the “Investment Fund”), which is reported as a governmental external investment pool in the financial statements. The Investment Fund is a 501(c)(3) non-profit corporation established to support the Uni­versity by operating an investment pool for charitable, non-profit foundations, associations, trusts, endowments, and funds that are organized and operated primarily to support the University.
Effective January 1, 2003, the assets of the Investment Fund were contributed and assigned to the UNC Investment Fund, LLC (“System Fund”), a North Carolina limited liability company organized and operated to invest member’s assets contributed and assigned to it from time to time by the Investment Fund and by The University of North Carolina and its constituent institutions and their related endowments and tax-exempt foundations. All or substantially all of the assets of the Investment Fund are expected to be invested in the System Fund. Separate, audited financial statements for the Investment Fund and System Fund are available. Refer to Note 1A to obtain the separate financial statements. The investment returns noted below refer to the pooled investment fund in existence for that time period.
The net assets of the endowment are categorized as restricted non-expendable, restricted expendable, or unrestricted.
Restricted non-expendable net assets include permanent endowments for which the donor has stipulated that the principal shall remain inviolate and be invested in perpetuity to generate earnings that can be expended consistent with the purposes specified in the gift instrument.
Restricted expendable net assets include internally designated endowments established by the University with restricted gifts and the undistributed earnings of permanent endowments.
Unrestricted net assets include internally designated endow­ments established by the University with unrestricted funds.
The investment objective is to earn an average real total return of at least 5.5 percent per year, net of all fees, over rolling five- and ten-year periods. The earnings distribution policy is to provide a stable source of spending support that is sustainable over the long term while preserving the purchasing power of the endowment. The earnings distribution rate was established at 5 percent of the previ­ous year’s market value, with annual increases based on inflationary factors. Each year’s distribution is subject to a 4 percent floor and a 7 percent cap based on estimated fiscal year-end market value.
n
n
n
Other long-term investments of $283.6 million at June 30, 2005 in­clude funds of $246.2 million of affiliated entities that are not part of the University’s financial reporting entity but do invest through the System Fund, and bond reserves and related funds of $37.4 million.
Most of the University’s endowment assets are managed within the System Fund, a pooled investment fund vehicle. The System Fund is designed to provide long-term, stable rates of return on the invested assets through the use of a highly diversified portfolio strategy. The nominal return on the endowment assets invested in the System Fund for fiscal year 2004-2005 was 15.5 percent, with a real return of 13 percent after inflation. The respective returns for fiscal year 2003-2004 were 16 percent and 12.8 percent. The System Fund return of 15.5 percent for 2004-2005 exceeded the Strategic Investment Policy Portfolio (“SIPP”) return of 13.8 percent by 1.7 percent. The System Fund’s return also exceeded the 70 percent S&P 500 / 30 percent Lehman Brothers Bond Index (“70/30”) return of 6.6 percent for the year.
The strong investment performance of the past two years has in­creased the three-year compound return to 11.5 percent at June 30, 2005. This three-year return measure compares well with the cor­responding measure of 10.3 percent for the SIPP and 7.8 percent for the 70/30. The System Fund is very well positioned in the current environment and remains invested according to the approved invest­ment policy that provides excellent diversification in both bull and bear markets.
Capitalapitalapitalapitalapitalapital Assetsssetsssetsssetsssets andandand Debtebtebt Managementanagementanagementanagementanagementanagementanagementanagementanagement
A critical aspect for enhancing and maintaining the University’s academic, research, and service programs and its residential life is the development and renewal of its capital assets. The University Board of Trustees approved the campus master plan to guide the University’s physical development in the 21st Century. The master plan meshes the critical pieces needed for smart growth in the 21st Century – transportation, parking, housing, utilities, and environ­mental sustainability – with the program needs of a growing campus. The master plan combines the practical requirements of a research university with the beauty that inspired its founders. The University will grow dramatically in the coming years.
A summary of changes in capital assets is disclosed in Note 5. Capital assets, net of accumulated depreciation, at June 30, 2005 and June 30, 2004 were as follows:
Capital Assets
%
2005 2004 Change
Construction in progress $377,522,418 $219,339,291 72.1
Land and other
non-depreciable assets 86,347,452 85,103,216 1.5
Buildings 798,180,554 703,546,321 13.5
General infrastructure 202,593,509 187,589,810 8.0
Machinery and equipment 85,557,205 81,090,703 5.5
Total $1,550,201,138 $1,276,669,341 21.4 2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 31
The University is engaged in a $1.5 billion capital construction program that began in 2000 and will continue through the next four years. This program includes major capital renewal of existing buildings and infrastructure to address both deferred maintenance and programmatic needs.
Major projects completed in fiscal year 2004-2005 include the Rams Head Center, the Michael Hooker Research Center for the School of Public Health, the addition to and renovation of Memo­rial Hall, the Carrington Hall addition for the School of Nursing, the Health Sciences Library renovation, and the Kenan, McIver, and Alderman residence halls renovations. The Rams Head Center combines a major new facility for student life with a new 700-car parking deck. It includes a retail grocery store, new dining facil­ity with six different venues, new student recreation center with three court gymnasium, elevated running track, exercise room, and cardiofitness center. The buildings constructed on top of the parking deck form a new open space and pedestrian bridges which connect this facility to student residences to the south and north campus. The new open space incorporates a sophisticated storm­water management system to capture and reuse stormwater as irrigation for the landscape. The Michael Hooker Research Center, the addition to the School of Public Health, provides new research laboratories and office space, lecture hall and seminar rooms, and a new atrium to provide much-needed gathering space for the School of Public Health.
Memorial Hall was originally constructed in 1931 and is used extensively for student assemblies and performances, lectures, concerts, and traveling theatrical productions. The project provided air-conditioning and a larger stage with wing space, as well as modernized stage equipment and production needs. The Car­rington Hall addition provides teaching laboratories, faculty offices and lecture hall for the School of Nursing. The new addition also features a rooftop garden which incorporates a stormwater management system to capture and reuse stormwater as irrigation for the garden. This addition will be the first LEED (Leadership in Energy and Environmental Design) certified building at Carolina.
The renovation of the Health Sciences Library provided a compre­hensive renovation to this 1960’s facility including new mechanical, electrical, and telecommunications systems. New compact storage on the ground floor allowed for the addition of group study space and a new café. The renovations to the Kenan, McIver, and Alder­man residence halls provided a comprehensive renovation includ­ing new heating and cooling systems, telecommunication wiring, and new elevators. The buildings are now completely accessible and the living rooms have been restored.
Major projects under construction at June 30, 2005 include Phase I of the Carolina Physical Science Complex, Student Family Housing, Phase II of the Residence College capital program, the Medical Sciences Research Building addition and renovation, and renovations to Burnett Womack Building. Ma­jor infrastructure improvements continue as part of the master plan for capital development.
Research facilities are a critical component of the construction program, and fiscal year 2004-2005 brought substantial improve­ments to the physical infrastructure supporting research. Several key research facilities were renovated, including the entire Health Sciences Library, the 11th floor of Mary Ellen Jones Building, the School of Dentistry Building, and the historic 440 West Franklin Street building. Renovations were begun in Brauer Hall, Burnett Womack, and the Medical Research Building. The School of Nursing addition and the new School of Public Health’s Hooker Center are fully occupied, equipped and contributing to our research capacity.
The Science Complex will replace outdated, deteriorating build­ings with state-of-the-art facilities. It will provide an innovative learning atmosphere for students and open doors for integrated collaboration among Carolina’s scientists. The complex will house the University’s departments of chemistry, computer science, marine sciences, mathematics, physics, and astronomy, and a new Institute for Advanced Materials, Nanoscience and Technology. The Science Complex Phase 1 is under way and both Phase II and III are projected to bid this year.
The 36 completed projects total $310 million, or 21 percent of the $1.5 billion capital construction program. The 42 projects under construction total $750 million or 50 percent, and the 64 projects under design represent $440 million or 29 percent. Capital funds resulting from North Carolina Higher Education Bonds continue to provide essential resources for construction. The University is directly investing in its capital construction program using a variety of other funding sources including University bonds, cost reimbursements from research grants, internal reserves, and private gifts. Previous changes in state legislation allowed the University to pledge a broader stream of revenues as security for its debt obligations, and general revenue bonds are issued to finance capital construction. The general revenue pledge results in a stronger, more flexible security that captures the strengths of not only the University’s auxiliary and student-related revenues, but also its research programs.
In December 2003, the University issued $108 million in fixed-rate bonds to finance certain capital construction projects. The University continues to use its commercial paper program that provides low-cost bridge financing for capital projects until gifts are received or in anticipation of an external bond issue. Com­mercial paper debt was $141.1 million at June 30, 2005 and $8.8 million at June 30, 2004. The commercial paper program and the general revenue bonds allow the University to use a central bank concept for funding capital projects. The University issues fixed and variable rate debt externally, and blends the average borrowing rate to allocate debt costs to individual capital projects and campus divisions. This concept provides a stable and flexible debt-funding source for capital projects.
The University maintains a combination of variable and fixed rate debt, consistent with its debt management policy. The effective, combined interest rate for variable and fixed rate debt was 4.5 percent for fiscal year 2004-2005 and 4.36 percent for 2003-2004. The interest rate on the commercial paper program for fiscal year 2004-2005 was 1.82 percent and for 2003-2004 was 0.98 percent. 32 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
Interest rates on the University’s variable rate, long-term bonds were 1.82 percent for fiscal year 2004-2005 and one percent for 2003-2004. Interest rates on fixed rate, long-term bonds are disclosed in Note 8B of the financial statements. The University’s financial strength allowed it to achieve ratings of AA+/Aa1 by the national rating agencies. The University debt service to op­erations ratio, a measure of an entity’s dependence on borrowed funds, was only 2.2 percent at June 30, 2005 and 2.1 percent for the prior year.
Other Non -current Assets
Other non-current assets were $98.6 million at June 30, 2005 and $158 million at June 30, 2004, a 37.6 percent decrease. Included in this category at June 30, 2005 are restricted cash and cash equivalents of $3.9 million, receivables for pledged gifts of $30.3 million, notes receivable for student loans of $29 million, restrict­ed resources due from the primary government of $27.1 million, and an investment in a joint venture of $8.3 million.
The decrease in other non-current assets from the prior year resulted primarily from a $67 million decline in cash and cash equivalents. The decline resulted from the expenditure of note proceeds invested as a cash equivalent for the Student Family Housing construction project and the discontinued use of reverse repurchase agreements which are sales of securities with a simul­taneous agreement for repurchase.
Restricted resources due from the primary government represent receivables for designated capital construction projects funded from proceeds from statewide higher education bonds and other state resources. The investment in a joint venture represents the construction of the Southern Astrophysical Research Telescope (SOAR), situated in Cerro Pachon, Chile, in South America, as part of an international consortium including the University.
Non -current Liabilities
Non-current liabilities were $732.7 million at June 30, 2005 and $750.7 million at June 30, 2004 and include funds held in trust for the University’s affiliated foundations and other campuses in the UNC System and their affiliates of $261 million and $235.6 million respectively. These entities are not part of the University’s financial reporting entity but do invest through the System Fund. The increase in funds held in trust of 10.8 percent over the prior year resulted from strong investment performance and participant contributions.
Long-term liabilities of $440.4 million at June 30, 2005 and $482.6 million at June 30, 2004 are the non-current portion of bonds payable, notes payable, capital leases payable, com­pensated absences, and annuities payable. The decrease of 8.7 percent from the prior year resulted from principal payments on bonds. The reader may refer to Note 8 for summary of changes in long-term liabilities. Other non-current liabilities of $31.4 million at June 30, 2005 and $32.5 million at June 30, 2004 are refundable U.S. government grants that provide resources for student loan programs.
Net Assets
Net assets represent the value of the University’s assets after li­abilities are deducted. The University’s net assets were $2.6 billion at June 30, 2005, an increase of $367 million over the prior year.
The invested in capital assets, net of related debt category rep­resents the University’s land, buildings, general infrastructure, equipment, and other capital assets net of accumulated deprecia­tion and net of the outstanding bonds and other indebtedness on the facilities. The restricted non-expendable category includes the University’s permanent endowments funds. The restricted expendable category primarily includes restricted internally designated endowments, gifts, contract and grant awards, and dis­tributed endowment earnings. The unrestricted category includes unrestricted internally designated endowments, gifts, auxiliary operations, facilities and administrative funds (overhead receipts), and other unrestricted funds. While there are no externally im­posed restrictions on unrestricted funds, the funds are generally designated by the University for specific academic programs or capital needs.
Restricted Non-expendable
$378,234,148
15%
Unrestricted
$475,630,812
18%
Investment in Capital Assets,
net of related debt
$1,017,382,707
39%
Restricted Expendable
$736,631,596
28%
2005 Netet Assetsssetsssetsssetsssets: $2,607,879,2632005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 33
Condensed Statement of Revenues, Expenses, and Changes in Net Assets
The Statements of Revenues, Expenses, and Changes in Net Assets present the University’s results of operations. The statements for the fiscal year ended June 30, 2005 and the prior year are summarized as follows:
University Operations
%
2005 2004 Change
Operating Revenues:
Student tuition and fees, net $164,456,925 $153,943,215 6.8
Grants and contracts 524,476,342 499,798,678 4.9
Sales and services, net 462,459,945 443,227,663 4.3
Other 5,608,155 5,667,765 (1.1)
Total Operating Revenues 1,157,001,367 1,102,637,321 4.9
Operating Expenses:
Salaries and benefits 966,629,252 917,840,235 5.3
Supplies and materials 148,439,992 151,196,308 (1.8)
Services 407,689,396 380,125,640 7.3
Scholarships and fellowships 51,169,976 47,427,018 7.9
Utilities 47,870,170 46,207,389 3.6
Depreciation 60,101,910 60,589,122 (0.8)
Total Operating Expenses 1,681,900,696 1,603,385,712 4.9
Operating Loss (524,899,329) (500,748,391) 4.8
Non-operating Revenues (Expenses):
State appropriations 406,672,962 380,446,327 6.9
Non-capital grants 62,544,341 53,153,741 17.7
Non-capital gifts, net 73,692,797 68,517,192 7.6
Investment income, net 154,899,571 135,369,198 14.4
Interest and fees on
capital asset-related debt (21,822,928) (18,339,114) 19.0
Other non-operating
r
evenues (expenses) 8,374,281 (8,132,036) 203.0
Income Before Other Changes 159,461,695 110,266,917 44.6
Capital grants 152,844,246 74,392,000 105.5
Capital appropriations 5,165,922 897,387 475.7
Capital gifts 11,520,297 6,358,879 81.2
Additions to
permanent endowments 37,687,946 24,098,374 56.4
Increase in Net Assets 366,680,106 216,013,557 69.7
Net Assets – July 1 2,241,199,157 2,025,185,600 10.7
Net Assets – June 30 $2,607,879,263 $2,241,199,157 16.4
Fiscal year 2004-2005 revenues and other changes and expenses total $2,070,403,730 and $1,703,723,624, respectively.
Fiscal year 2003-2004 revenues and other changes and expenses total $1,845,870,419 and $1,629,856,862, respectively. 34 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
Operating perating Revenues
The operating revenues represent resources generated by the University in fulfilling its instruction, research, and public service missions. Student tuition and fees are reported net of the scholar­ship discount, which was $37.9 million for fiscal year 2004-2005 and $33.3 million for the prior year. Total revenues from student tuition and fees increased 6.8 percent over the prior year. The 2004-2005 tuition rates increased 8.5 percent for undergradu­ate residents, 10.1 percent for undergraduate non-residents, 7.9 percent for graduate residents, and 9.9 percent for graduate non-residents. There were also limited tuition increases for the professional schools. The revenue growth from the rate increases was offset by a shift in residency status among graduate students from non-resident to resident.
Revenues from grants and contracts increased 4.9 percent over the prior year as reflected in the financial statements. Discussion of grants and contracts in terms of awards provides another useful perspective. The University is among the nation’s leading public research universities, with a diversified portfolio of research that attracted more than $579 million in sponsored program awards during fiscal year 2004-2005, a 0.3 percent increase over the pre­vious year. During the same period, awards from the Department of Health and Human Services increased more than 4 percent to $338 million. During the federal fiscal year 2003-2004 (the latest available numbers), University faculty attracted $289.7 million in National Institutes of Health (NIH) awards, up from $271 mil­lion in 2003, ranking 15th overall among U.S. private and public universities. The University is the top public university in the South and one of only six Southern universities, public or private, cited in the NIH’s top 20. All five of the University’s health af­fairs schools – dentistry, medicine, nursing, pharmacy and public health – ranked within the top 20 of public and private institu­tions, according to the NIH. The University continues to rank in the top 20 educational institutions nationally in federal support for science and technology.
The NIH Roadmap committee and office established by the Office of the Vice Chancellor for Research and Economic Development, has been instrumental in supporting a number of new research initiatives that are geared toward new funding op­portunities at NIH. Last year, Carolina researchers received three of the 21 P-20 NIH Roadmap Awards offered nationally. The Citizen-Soldier Support Program coordinated by the University was initially funded through a $1.8 million Congressional award. The program facilitates practical and emotional support for North Carolina National Guard and Reserve soldiers and their families preparing for, during and after return from deployments. This initiative gives communities more ways to support military men and women and their families and shows that Carolina and its program partners connect with the citizens of this state and their needs.
Sales and services and patient services revenues of $462.5 million for fiscal year 2004-2005 represent an increase of 4.3 percent over the prior year and include the revenues of campus auxiliary operations such as student housing, student stores, student health services, the utilities system, and parking and transportation, as well as revenues from patient services provided by the profes­sional health-care clinics. Net revenues generated by the health-care clinics decreased 0.5 percent in 2004-2005. Although gross revenues from patient services net of the allowance for uncollect­ible accounts increased by 4.2 percent, the $17.7 million increase in indigent care and contractual adjustments caused the slight decrease in net revenues from patient services. Other revenues of $5.6 million for fiscal year 2004-2005 represent operating resources not separately identified and include, as examples, an assessment to the Investment Fund to support administrative ser­vices, library fines, and interest income from student loans.
Operating perating Expenses
The University’s operating expenses were $1.7 billion for the fiscal year ended June 30, 2005, an increase of 4.9 percent over the prior year. The operating expenses are reported by natural classification in the financial statements and by functional
classification in the note disclosures (Note 11). The following table illustrates the University’s operating expenses by the func­tional classification:
Operating Expenses by Function
%
2005 2004 Change
Instruction $575,951,072 $532,927,326 8.1
Research 271,208,156 257,945,228 5.1
Public Service 83,004,683 78,275,601 6.0
Academic Support 75,384,219 75,692,980 (0.4)
Student Services 21,652,715 20,487,890 5.7
Institutional Support 67,425,927 64,731,371 4.2
Operations and Maintenance
of Plant 92,860,245 87,890,864 5.7
Student Financial Aid 51,169,976 47,427,018 7.9
Auxiliary Enterprises 383,141,793 377,418,312 1.5
Depreciation 60,101,910 60,589,122 (0.8)
Total Operating Expenses $1,681,900,696 $1,603,385,712 4.9
The following graph illustrates the University’s operating ex­penses by function.2005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 35
Operating expense categories reported by natural classification gen­erally increased or decreased at a comparable rate to total operating expenses. Salaries and benefits increased 5.3 percent in 2004-2005 over the prior year, expenses for services increased 7.3 percent, scholarships and fellowships increased 7.9 percent, and utilities increased 3.6 percent. Supplies and materials decreased 1.8 percent, and depreciation decreased 0.8 percent.
Non -operating operating Revenues and Expenses
State appropriations of $406.7 million, noncapital grants of $62.5 million, non-capital gifts of $73.7 million, investment income of $154.9 million, interest and fees on capital asset-related debt of ($21.8) million, and other revenues and expenses of $8.4 million comprise net non-operating revenues and expenses. These revenues are considered non-operating because they were not generated by the University’s principal, ongoing operations. For example, state appropriations were not generated by the University but were pro­vided to help fund operating expenses.
The University’s initial budget for state appropriations was $400.7 million for fiscal year 2004-2005. Budget increases of $17.5 million included funding of $10.4 million for salary and benefit increases for faculty and staff, $4.6 million for increased student enrollment including distance learning and other program enhancements, and $2.5 million for other initiatives. Budget reductions in state ap­propriations were $11.5 million. Included in the budget reductions was a $1.1 million decrease based on legislation which exempted the University from paying sales and use taxes which resulted in lowering operating expenses by a like amount. A budget reduction of $2.9 million was required in response to storm damage suffered throughout the state in August and September of 2004 resulting from hurricanes. The resulting appropriations of $406.7 million represented a 6.9 percent increase over fiscal year 2003-2004. The University uses an annual budget planning and hearing process with all deans and vice chancellors. The review process provides a frame­work to implement differential budget reductions.
Non-capital grants increased by 17.7 percent to $62.5 million in fiscal year 2004-2005 and represent federal awards that are not con­sidered to be operating revenues. Net non-capital gifts increased by 7.6 percent to $73.7 million and represent expendable gifts received and pledges made and are net of an allowance for uncollectible pledges. Net investment income of $154.9 million, an increase of 14.4 percent over 2003-2004, includes income and realized and unrealized gains and is net of realized and unrealized losses and investment management fees. For detail discussion, the reader may refer to Endowment and Other Long-term Investments section of Management’s Discussion and Analysis. Interest and fees on capital asset-related debt were ($21.8) million, an increase of 19 percent over the prior year.
Other non-operating revenues and expenses were $8.4 million and include a $6.6 million increase in the net assets of annuities and charitable remainder trusts. These annuities and charitable remain­der trusts include split-interest agreements that have a liability component for the present value of projected future distributions to the annuitant or donor and liabilities to other organizations where
Student Financial Aid
$51,169,976
3%
Auxillary Enterprises
$383,141,793
23%
Research
$271,208,156
16%
Academic Support
$75,384,219
4%
Student Services
$21,652,715
1%
Institutional Support
$67,425,927
4%
Instruction
$575,951,072
34%
Public Service
$83,004,683
5%
Depreciation
$60,101,910
4%
Operations
and Maintenance
of Plant
$92,860,245
6%
2005 OPERATING EXPENSES BY FUNCTION: $1,681,900,696
Depreciation
$60,101,910
4%
Scholarships
and Fellowships
$51,169,976
3%
Salaries and Benefits
$966,629,252
57%
Supplies and Materials
$148,439,992
9%
Services
$407,689,396
24%
Utilites
$47,870,170
3%
2005 OPERATING EXPENSES BY NATURE: $1,681,900,696
The following graph illustrates the University’s operating expenses by the natural classification.36 | THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
the University reporting entity serves as trustee but not the ben­eficiary of the split-interest agreements. Changes in the actuarial calculations of the liabilities will increase or decrease the net as­sets of the annuities and charitable remainder trusts. The increase in fiscal year 2004-2005 over the prior year resulted in part from net asset increases in these annuities and trust.
Total otal Operating perating and Non -operating operating Revenues
Operating and non-operating revenues such as state appropria­tions, noncapital grants, noncapital gifts, and investment income are used to fund University operations. The following chart illustrates the University’s operating and non-operating revenues which total $1.9 billion for fiscal year 2004-2005.
Other Changes in Net Assets
Capital grants of $152.8 million for 2004-2005 and $74.4 mil­lion for 2003-2004 are from statewide higher education bond proceeds for capital construction projects. Capital appropriations of $5.2 million for 2004-2005 and $0.9 million for the prior year were received from the state for repairs and replacements. Net capital gifts of $11.5 million for 2004-2005 and $6.4 million for the prior year resulted from fund-raising efforts and also provided funding for construction projects. Non-expendable gifts and funds from the state’s program to match gifts for distinguished professorship endowments resulted in additions to permanent endowments of $37.7 million during fiscal year 2004-2005 and $24.1 million during fiscal year 2003-2004.
Condensed Statement of Cash Flows
The Statement of Cash Flows provides additional information about the University’s financial results by reporting the major sources and uses of cash. Cash decreased by $85.3 million during the fiscal year 2004-2005, compared with an increase of $46.9 million during fiscal year 2003-2004. The primary factor which caused the decrease in the cash position at June 30, 2005 was the decreased use of the State Treasurer’s short-term investment fund (STIF), which is classified as a cash equivalent, for the University’s temporary investment pool. The temporary investment pool’s investment in STIF was $120 million at June 30, 2004 and zero at June 30, 2005. The statements for the fiscal year ended June 30, 2005 and the prior year are summarized as follows:
Cash Flows
2005 2004 %
a
s Restated Change
Cash Flows Provided (Used): Operating activities ($460,045,805) ($348,742,031) 31.9 Noncapital
financing activities 589,302,508 325,768,875 80.9
Capital and related
financing activities (67,227,484) (107,595,259) (37.5)
Investing activities (147,354,384) 177,517,901 (183.0)
Net Increase (Decrease)
in Cash (85,325,165) 46,949,486 (281.7)
Cash – July 1 544,687,966 497,738,480 9.4
Cash – June 30 $459,362,801 $544,687,966 (15.7)
Cash flows from operating activities include, as examples, cash received for tuition and fees or research grants and sala­ries paid to faculty or payments of invoices to vendors. Since state appropriations, gifts, and certain other revenues are not considered operating revenue, operating activities had a net cash outflow for both fiscal years.
Noncapital financing activities include state appropriations received for operations and noncapital gifts, and had a net cash inflow for both fiscal years. n
n
22%
8%4%3%1%
Student Tuition and Fees, net
$164,456,925
9%
Federal Grants and Contracts
$403,099,819
22%
Other Operating Revenues
$4,167,246
0%
Interest Earnings on Loans
$1,440,909
0%
Sales and Services, net
$290,397,166
16%
Patient Services, net
$172,062,779
9%
Nongovernmental
Grants and Contracts
$81,560,319
4%
State and Local Grants and Contracts
$39,816,204
2%
NON-OPERATING REVENUES $706,183,952
38%
(SEE BREAKDOWN BELOW)
State Appropriations
$406,672,962
22%
Noncapital Grants
$62,544,341
3%
Noncapital Gifts, net
$73,692,797
4%
Investment Income
(net of Investment Expense of $3,707,578) $154,899,571
8%
Other Non-Operating Revenues
$8,374,281
1%
NON-OPERATING REVENUES
2005 Totalotalotalotal Revenuesevenuesevenuesevenuesevenuesevenuesevenues By Sourceourceourceourceource:
$1,863,185,3192005 COMPREHENSIVE ANNUAL FINANCIAL REPORT | 37
The cash flows from capital and related financing activi­ties include the proceeds received from short-term and long-term debt obligations, the repayment of debt, and the acquisition and construction of capital assets.
The net cash outflows from investing activities include purchases and sales of equity securities and other investments as well as interest and dividends received. The significant change in the cash flows from investing activities resulted from additional investment purchases due to increased levels of gifts and other funds available for investment.
Component Units Reported
Using Discrete Presentation
Potential component units of the University, primarily the affili­ated fund-raising foundations, are evaluated to determine if the financial statements of the potential component unit should be:
a) combined with those of the University in the Comprehen­sive Annual Financial Report (CAFR),
b) reported separately (i.e., discretely) along with the Universi­ty’s financial statements in the CAFR, or
c) not reported in the CAFR.
Three affiliated foundations were categorized as component units using discrete presentation. Discrete presentation provides readers with complete information regarding the financial ac­tivities of the components units. The reader may refer to Notes 1A for additional information regarding the three affiliated foundations.
Summary information regarding the financial activities of the three affiliated foundations follows:
Total Net Assets
%
2005 2004 Change
Assets and Liabilities:
Total assets $431,586,835 $389,576,735 10.8
Total liabilities 2,165,737 2,387,485 (9.3)
Total net assets $429,421,098 $387,189,250 10.9
Net Assets Composition: Unrestricted $20,653,221 $17,723,823 16.5
Temporarily restricted 238,744,849 209,029,695 14.2
Permanently restricted 170,023,028 160,435,732 6.0
Total net assets $429,421,098 $387,189,250 10.9
Unrestricted net assets are expendable and do not have external restrictions regarding use of the resources, temporarily restricted net